This ‘Investing 101’ Tip Is A Mess When It Comes To Distribution

Having a diverse portfolio is pretty much Investment 101, right?

I mean, it’s one of the first things we all learn as Muslims. But there is a problem here: Going to balance in stocks “regularly”, bonds or ETFs can mean leaving money on the table.

To see what I’m getting at here, look at the average yield on the two ETFs most people buy for stock and bond exposure. As for stocks, I don’t need to tell you about SPDR S&P 500 ETF Trust (SPY). It is the popular S&P 500 tracker. And it yields a microscopic 1.2%.

There are many options on the bond side, but let’s go with the ETF with the highest yield, that is SPDR Bloomberg High-Yield Bond ETF (JNK). It holds high yield, or “junk,” bonds that many investors (wrongly, as we’ll see shortly) see as risky.

JNK yields 6.4%, which is clearly better than 1.2%. But if you compare the two together, you get only 3.8% yield.

3 Clicks for Quick Diversification — and 8.1% Yield

The good news is, there is an asset class out there that gives us the same level of diversification but with way High income: I’m talking 8%+ yield, with regular monthly payments.

If you have been reading me for a while, or you are my member CEF Insider service, you may know where I go next: there are closed-end funds (CEFs), which yield about 8% on average when I write this.

Below I have three CEFs (one that holds stocks, one that holds high yield bonds and one that holds a good stock-bond combo) that, when taken together, pay an average yield of 8.1%. Two of these funds pay monthly dividends, too.

Let’s talk about them, starting with our equity CEF.

Skip: Skip SPY, Go with ADX Instead

As CEF Insider‘s Investment Strategist, I had a lot of time to talk with the staff of Adams Funds, a partner of Adams Diversified Equity Fund (ADX). These talks have always left me impressed. These people are professionals, dedicated to the value of the shareholders and committed to ensure a stable and reliable payment.

ADX, which gives 8.2% today, also gives us the opportunity to reach a level of organizational activity that is very difficult (if not impossible) to find elsewhere, inside or outside ECFs: This fund was launched in 1929, on the eve of the Great Depression. It’s nearly 100 years old to deal with anything the market throws at it.

As we will see in a moment, the result of the long event has been a market-beating performance.

The long-term knock on ADX is that until the beginning of this year, it paid out most of its dividend as a one-time payment, the end of the year was variable based on the fund’s net asset value (NAV, or its value). portfolio). That has caused some CEF investors to give ADX a pass in favor of monthly or quarterly payments.

Management has now resolved this issue: Under the change introduced earlier this year, ADX promises to pay less than 2% of NAV per quarter, for an average 8% yield on NAV. That adds stability to the payout while still letting it rise with the value of the fund.

So if you own SPY or one of its cousins ​​now, consider switching it out of ADX. You will have access to many of the same stocks, and ADX’s dividend policy means that it “converts” the stocks that earn to dividends, giving you a solid income if you withdraw these earnings as cash.

And if you pay back your down payment, you get a real shot at beating the market. ADX has crushed SPY since we added to it CEF Insider portfolio in July 2017:

Now let’s talk about discounts: As I write this, ADX trades at a price of 11.7% to NAV, meaning that we get its portfolio of high-quality stocks, including. Microsoft (MSFT), Apple (AAPL), and Amazon.com (AMZN), for about 88 cents on the dollar.

As you can see above, the discount decreased to below 7% at the beginning of this year, on the news of the new dividend policy. It then pulled back, but as interest rates drop and investors seek higher yields, I expect them to return to the ADX, drawn by its new dividend policy, its strong performance history and its high yield, as well.

High-Yield Bonds: Think BGH, Not JNK

For the bond, let’s go with it Barings Global Short Duration High Yield Fund (BGH).

BGH focuses on the company’s high-yield bonds and yields 8.4%, focusing on short-term bonds as a way to reduce the risks of bonds that fall in value during market panic, as they have reached an early maturity.

The fund’s payout is monthly and stable, has gone unchanged for years, with the odd special dividend (the spikes below), too:

It is a much bigger part than JNK offers. And even JNK he does monthly payout, BGH’s payout is a picture of stability compared to JNK’s “squirrely” dividend:

By lending to large, established companies, BGH creates reliable cash flow. Limiting its investment to short-term bonds also reduces the risk of these investments going sour.

And as you can see below, the BGH discount is still wide, about 6%, but it is going up-a very good setup.

I see this one selling at a higher premium as more investors make their way to bonds as the Treasury issues less and CDs get bigger.

Finally, a word on junk bonds and the risk of default, which is too high. As we discussed in September CEF InsiderAmerican companies are away from difficulty meeting their obligations, with less than 1% of issuers defaulting:

So don’t let the words “junk” or “high-ego” put you off—and cause you to miss out on BGH and its steady (and monthly paid) 8.4%-yielding share.

The All ‘Rounder: The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO)

The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) It gives us exposure to the top US majors like Microsoft and Apple, like ADX. But US stocks make up only 48% of the portfolio.

The next-largest share (36%) goes to international companies such as Nestle SA, pharmaceutical company Sanofi and Compass Group PLC, a British food company.

The rest (around 16%) is in receivables, mostly investment-grade bonds, to increase stability. The whole package offers 7.8% interest, payable monthly. And the administration recently raised it:

Trading at an 8.7% discount to NAV as I write this, BGH offers a smart mix of growth and capital at a trading price and, like BGH, that margin is slowly fading.

To top it off, the fund has also delivered a strong annualized return of 9.6% over the past 10 years, adding solid performance to our high, rising monthly payments and “stair-stepping” discount.

Michael Foster is the Principal Research Analyst of Contrarian Outlook. For more great investment ideas, click here for our latest list “Unbreakable Income: 5 Bargain Income with Steady 9.3% Dividends.“

Disclosure: none