Retirement Trio: Stocks, Bonds And Real Estate

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Our dream scenario is a retirement that is funded entirely by dividends. That’s the path we’re going down today, with three closed-end funds (CEFs) boasting an incredible average yield of 10.5%, asserts Michael Foster, investment strategist for Contrarian Outlook.

Of course, diversification is critical, so we want our CEF portfolio to hold the following stocks (for long-term growth); bonds (for stable income) and real estate (for a bit of both)

It’s not easy to cobble together a portfolio that ticks all three of these boxes. And if you invest in real estate through the physical property, you’re looking at a lot of work. (If you’ve been a landlord, you know it’s a full-time job.)

But you can hit all three categories and get a big income stream with CEFs (with virtually no work!). Here are three funds that, taken together, do just that.

Let’s start with the Liberty All-Star Equity Fund (USA), which holds large-cap US companies with strong cash flows and growth potential, like Microsoft (MSFT), UnitedHealth Group (UNH), and Visa (V). USA’s managers have also done a nice job of scooping up oversold high-margin firms like Alphabet (GOOGL), Danaher Corp. (DHR), and Adobe (ADBE).

The draw here is the dividend, with the USA yielding 10.2%. That dividend comes from payouts on slightly levered stocks in the portfolio, plus returns from management’s timely buys and sells. It’s a strategy that works, with the USA posting an outstanding 214% total return in the last decade.

We also get a nice “in” courtesy of the USA’s valuation. Right now, the fund trades around par (or about the same as the value of the shares in its portfolio). That’s a fair level when you consider that this one has traded at premiums north of 3% in the past year.

For bonds, we’ll take the Neuberger Berman High Yield Strategies Fund (NHS), which sports a 3.3% discount to NAV. That’s a sweet deal, given that it traded at par as recently as August.

The dividend is truly jaw-dropping, with a 13.4% yield. If you think a payout like that can’t possibly be safe, consider that NHS has kept it rolling in steadily for 10 years, despite the pandemic and rising rates. The reason? A strategic pivot by management toward higher-quality, underpriced corporate bonds.

Those bonds, in particular, give NHS two ways to deliver strong returns: higher income and, over the longer term, gains as they get repriced with improving investor sentiment. This strategy is exactly what we want in this uniquely oversold, but starting to recover, market.

Finally, let’s go with the Cohen & Steers Quality Income Realty Fund (RQI). The fund has more than 200 holdings, almost all of which are real estate investment trusts (REITs). Those REITs, in turn, own hundreds, or even thousands, of properties apiece, so we have zero worries about diversification here.

Top RQI holdings include cell-tower owner American Tower (AMT), whose services are in constant demand as mobile-data traffic grows; self-storage REIT Public Storage (PSA), which stands to gain from the boom in “stuff” over the past couple of years; and warehouse REIT Prologis (PLD), which is benefiting as US companies move their manufacturing back home.

REITs’ above-average dividends fuel RQI’s 8% payout, which has held steady for the last five years. With rising rents everywhere, the fund’s income stream is more secure than ever—and investors are taking notice.

We’ve seen investors flock to RQI over the last two months, but significantly more upside is on tap as a potential leveling off of rates benefits real estate. I also expect more upside as RQI’s 3.3% discount returns to par—a level at which it’s traded for most of the year.

Put all three of the above CEFs together and you’ve got a 10.5% income stream fully diversified across hundreds of assets in three different classes. That’s a nice setup for 2023, which looks like a much better year overall for the market, but with volatility likely to stick around, too.
 

About the Author

Michael Foster, PhD, has worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies. Dr. Foster reports are widely read by analysts and portfolio managers at some of the largest hedge funds and investment banks in the world, with trillions of dollars in assets under management. He received his PhD in 2008 and continues to offer consulting services to institutional investors and ultra-high-net-worth individuals.


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