Oith the rapid decline in stock markets we’ve seen since the start of 2022, and now you can be forgiven if your stomach tightens a bit when you go to check your retirement account.
So today I’m going to give you my top three tips for securing your hard-earned cash – and better yet, locking in a stream of dividends you can easily live off of in retirement. And no, you won’t need a seven-figure nest egg to achieve what I’m about to show you now.
Step #1: Diversify the right way
You may know that diversification is key to protecting your wealth, but if you go only halfway, you’re hurting your earning potential (and setting yourself up for potentially serious losses). By “only going halfway” I mean doing what a lot of people do: throw their money into a low-cost index fund like the SPDR S&P 500 ETF (SPY) and stay there.
The problem is that pullbacks don’t affect all stocks equally, and this time around we need to be particularly selective, as still-high stock valuations and exaggerated fears about rising rates mean some sectors were hit harder than others. And in today’s cruel market, sometimes individual stocks turn in flawless quarterly earnings and always be punished!
This means we need to take a more active approach, because sitting in an index fund locks you into all sectors, and losers will drag your overall return down, just as they did for indexers this year:
1-click investing exposes you to losing sectors
The first step towards protecting our savings? Go beyond stocks to other assets, such as bonds.
Most people start with government-backed Treasuries, which can help offset any hits you may take in the stock market, as Treasuries tend to rise when stocks fall (and vice versa) . But that’s not always the case, as we can see below by comparing the performance of the S&P 500 with Treasuries using the iShares US Treasury Bond ETF (GOVT):
The “cushion” of the Treasury is flattening
And even when treasury bills do oppose stocks in a bear market, they do not rise enough to compensate for the decline in stocks. We need to dig deeper.
There are many other investments that follow their own path, which is not necessarily in the same direction as stocks. For example, municipal bonds tend to rise when people are more risk averse, while tech stocks fall. So you want to make sure you have a bit of both so you can take advantage of one when the other breaks down.
The municipal bond market can be difficult to access for individual investors, so I recommend doing so through a closed-end fund (CEF) – more on those below – like the Nuveen Municipal High Income Opportunities Fund (NMZ), a 5.8% yield that pays dividends monthly (I wrote about NMZ and two other CEF muni-bonds that are expected to rebound in the coming weeks in last Thursday’s article).
This diversification across asset classes is the most important tool the ultra-rich use to protect their nest egg. The stories you hear of multi-millionaires losing everything? It is almost always the result of a lack of diversification. Take Masayoshi Son, the Softbank Multibillionaire Who Lost About $70 billion (yes, with a “b”) during the dot-com crash in 2000. Why? Because all his money was in stocks.
Step 2: Add high-yield closed-end funds to your stocks
Let’s go back to stocks for a moment, because buying them through CEFs also gives you many advantages. For one, CEFs offer much higher dividend yields than most stocks and ETFs, with payouts of 7% and higher the norm in this space.
Additionally, due to a quirk in their structure, CEFs often trade at discounted prices relative to net asset value (NAV, or the value of their portfolio holdings), while ETFs always trade at par. . These discounts are easy to spot on any reputable CEF screener, making it easy to find bargains.
For example, you can buy a broad-based CEF stock, such as the Gabelli Dividend and Income Fund (GDV), which owns stocks from all sectors, including Alphabet (GOOGL), Mastercard (MA) and JPMorgan Chase & Co. (JPM); GDV is yielding a nice 5.6% as of this writing (paid monthly), while trading at a 13% discount to NAV. By choosing a CEF stock that covers all sectors, you trust the fund manager – in this case, superstar value investor Mario Gabelli – to rotate between sectors for you.
The other option is to do it yourself and buy CEFs from different sectors, like the Tekla Life Sciences Investors Fund (HQL), and its yield of 9.4%, for health; the John Hancock Financial Opportunity Fund (BTO) for financial stocks (with a dividend of 5.1%); or the Reaves Utility Income Fund (UTG)–current yield of 7.3% – for utilities. You can then rotate in and out of these funds as their net asset value discounts widen and narrow, or switch from a discount to a premium.
Whatever your strategy, this approach gives you instant diversification between stocks and reduces your risk of overpayment, thanks to the rebates of your CEFs on the net asset value.
Step #3: Lock in big cash dividends
The final key to protecting your nest egg is also the most often overlooked: ensuring a stream of income. Because if you can invest your nest egg in assets that produce income above your annual costs, provided the income stream never dips below your expenses, you can largely ignore market fluctuations.
CEFs like the ones we have just seen do it, and with a relatively modest initial investment, with their outsized dividends of 5%, 7%, 8% and even more. That’s why CEFs are an excellent foundation for the core of your retirement portfolio.
This is much better than what you would do with Treasury bills: even if the 10-year Treasury rate hits 2%, you still get less than $2,000 a month if you invest a million dollars. That’s less than $15 an hour, which is currently below minimum wage in much of the United States.
With the S&P 500, you get even less – $1,085 a month in income on a million dollars. Madness! People try to subsidize these paltry income streams by reaping capital gains on their stocks, but that’s a lot easier said than done. Structuring payouts so you don’t destroy your portfolio is next to impossible, especially if you end up retiring a year or two before a recession.
To demonstrate this, look at what happens to a $1.2 million nest egg placed in the S&P 500 just before the crash of 2008-09; although he grows up a bit before the end of 2008, things quickly go downhill:
Source: CEF Insider
As if that weren’t enough, it’s doubly devastating for retirees who need income from their investments. Look at what happens to a retiree over the same period who is trying to live on $45,000 of passive income on that $1.2 million nest egg:
Source: CEF Insider
Even with a conservative withdrawal rate of 3.8%, the retiree’s nest egg takes several years to recover from the 2009 loss – and although the S&P 500 recovered in 2013, the retiree’s portfolio would still be down 18.9% compared to five years earlier.
Why? Due to a lack of strong revenue streams. Again, that’s why high-yielding CEFs, which pay enough to allow many people to retire on dividends alone with less than $500,000, are your best plays here.
5 More CEF Top Picks for 2022 (with 7.4% Dividend, 20% Earnings on Draft)
The beauty of the CEF market is that it is small (with only around 500 funds). This means that it is mainly individual investors, rather than large institutional players, who buy these funds. And this means that offers at erroneous prices are regularly offered to us.
The 5 CEFs that I have uncovered for you here are great examples. They now fetch an outrageous 7.4%, on average, and they’re all trading at ridiculous discounts because the headline crowd ignored them. It won’t last, though, that’s why I beat the table More than 20% price gains of such well-run plays this year.
(And even if the market pulls back further, the steep discounts of these 5 funds help cushion them, allowing us to enjoy their 7.4% average payout with peace of mind.)
I have all the details on these 5 must-have CEFs waiting for you now, and I can’t wait to share them: Click here for more details, including names, tickers, current yields, best buy prices and continued.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.