It was already hard to find income-producing investments. Now, thanks to the recent vaccine-inspired rally in stocks, it is harder than ever.
We need an alternative approach to income investing. This can be found in the best high-yield dividend funds to buy.
Very few companies pay the type of dividend that provides enough cash flow to supplement your retirement in any meaningful way. High dividend stocks like Altria (MO) and AT&T are few and far between right now.
That will not change as long as stocks are going higher on vaccine-related news.
Today when we look for income, bonds are out due to low yields. Junk bonds are out due to inadequate yields for the risks assumed. Bank accounts and certificates of deposit have been out for a long time and will most likely stay out for an even longer time.
Now stocks are out as well, thanks to the recent rally back to all-time highs.
As a result, we are going to have to get a little more unconventional in our search for income. If mainstream income choices are not getting the job done, it is time to look in another direction.
Let's get into those high-dividend funds now...
A Dividend Strategy That Works
One of the very best alternative income strategies is to buy heavily discounted closed-end funds. In fact, one of these high-dividend funds yields 9% today.
Closed-end funds are mutual funds that trade on the exchanges and have a fixed number of shares. Because of these two factors, closed-end funds are swimming in the same psychological soup as traditional stock investors.
Sometimes they can trade at a discount to the value of the stocks and bonds they own.
More popular funds in hot sectors can trade at a premium to that value.
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Brokers sold most closed-end funds via an IPO to retail investors. Almost all of them have an income element as the high income made the shares easier to sell.
Buying closed-end funds when they are trading at a discount to net asset value and collecting dividends until that discount narrows has proven to be a very profitable way to invest for income.
Managing a portfolio of closed-end funds is not difficult once you understand the basics of the strategy. It can, however, be time consuming.
There are some other options for those who don't want to spend the time or are just not interested in doing the homework and surveillance.
This Dividend Fund Pays 9%
Saba Capital runs a managed exchange-traded fund that invests in closed-end funds using a discount-based strategy. The Saba Closed-End Funds ETF (CEFS) is managed by a fixed-income team that has been trading closed-end funds for years. The firm is managed by Boaz Weinstein, one of the best fixed-income investors in the world today.
When the London Whale trader almost broke JP Morgan (JPM) by losing billions of dollars in fixed-income markets, Weinstein was on the other side of many of the trades. A fair amount of the billions the bank lost ended up in his and his investors' pockets.
Weinstein and his team have been known to take an activist stance to force fund management companies to take steps to close the discount at certain funds. Saba will buy large blocks of shares and have been known to wage proxy fights to gain board seats when required.
They have had a great deal of success forcing funds to conduct tender offers and buy back shares to narrow the discount. By owning the Saba Closed-End Fund ETF, you can have the firm's aggressive activist approach put money into your pocket as well as theirs.
The Saba CEF fund also allows you to quit worrying about what rising interest rates might do to your income portfolio as they hedge against interest rate increases.
The fund is currently yielding 9.2%. The fund pays the dividend monthly, so this fund can be part of a Paycheck Replacement Strategy that makes regular deposits into your account.
For additional income, here's another high yield dividend fund to invest in today.
Best High Dividend Fund Today
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The Invesco CEF Income Composite ETF (PCEF) is another exchange-traded fund that invests in closed-end funds.
This is not a managed fund but is an index based on the S-Network Composite Closed-End Fund Index. This index tracks the performance of income-oriented closed-end funds.
While it is not a managed fund that uses a targeting discount strategy, many of the funds in the index will trade a discount and shareholders can still benefit from narrowing discounts.
The CEF Income Composite also pays monthly and could be used in a paycheck replacement portfolio.
This one pays a hefty yield of 8.64%.
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