BUI - Five 7+%-Yielding Monthly Paying Retirement Dream Stocks

2023-03-27 07:15:00 ET

Summary

• Closed-End Funds, or CEFs, are a popular form of monthly paying stocks.
• Most, however, are dangerous and lack income dependability, due to destructive use of Return of Capital (unsustainable dividends that fall over time).
• Here are five high-yield, monthly paying CEFs that offer dependable income that's stable over time, as well as historically solid long-term returns.
• However, there are 3 downsides to consider before buying even the highest quality and safest CEFs.
• I can recommend these five CEFs as part of a diversified and prudently risk-managed portfolio, but you can achieve monthly income through owning high-yield blue chips that pay dividends in dividend months. That way you not only enjoy a safe high monthly yield but also inflation-adjusted income growth over time, as well as superior long-term returns and wealth compounding.

The Original Special Video Report Version Of This Article Was Published On Dividend Kings (Preparing For Recession 22) On August 18th, 2022. The data has been updated for March 22nd.

It's part of the Dividend Kings 75 Part Preparing For Recession Video Series.

This week I'm attending a work conference and thus publishing updated versions of these video articles.

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We all dream of a comfortable or even rich retirement, and closed-end funds ("CEFs") are some of the highest-yielding stocks on Wall Street. However, most are "sucker yields" that should be avoided like the plague.

Fortunately, there are always a few diamonds hidden among the trash in almost any asset class, so here are five high-yield monthly paying CEFs that are potentially retirement dream stocks.

They are so good we have them in our Dividend Kings ETF tracker, our top two dozen exchange-traded fund ("ETF") and CEF recommendations for members.

Most CEFs Don't Offer Dependable Income, But These 5 Do

• 4 Steps To Analyzing Closed-End Funds (CEFs) For Safety & Income Dependability With 6 Examples
• see this introduction to CEFs for what they are, why most are dangerous, and the easiest ways to analyze whether a CEF is a potentially good investment idea

Closed-end funds are similar to mutual funds, with a few key differences.

• like ETFs, they trade all day on the stock market
• they IPO with a set amount of money that management has to invest.

If investors want to invest $1 billion more into a mutual fund or ETF, new shares are created, and shares are destroyed if $1 billion is pulled out.

With CEFs, if investors want to buy $1 billion worth of a CEF, they bid up the price in the stock market, and it trades at a premium to net-asset-value, or NAV.

Why do CEFs exist? Management usually loves their high fees (some higher than hedge funds). Why do investors bother with these things?

4 Reasons To Consider CEFS

1. usually, high yield focused
2. often pay monthly distributions
3. offer exposure to alternative assets
4. actively managed (so professionals running alternative assets for you).

The ability to enjoy a safe and generous monthly yield is the main draw of CEFs, BUT unfortunately, as I explain in the above special report, most CEFs are dangerous value and yield traps.

• they often use high leverage
• and more speculative investment strategies, such as derivatives.

But some stock-focused ETFs (bond-based ETFs tend to offer more sustainable yields) are dependable sources of generous monthly income.

I recently found an old spreadsheet from my days working for Safely Safe Dividends (where I learned to analyze safety and quality in a methodical checklist fashion) that included five recommended high-yield monthly paying CEFs.

(Sources: Morningstar, Nuveen.)

You'll notice that infrastructure and hard assets are the common themes for these CEFs. The average expense ratio is 1.81%, which is almost 5X higher than the average mutual fund's 0.46%.

• Yield is net of expenses.

(Sources: Morningstar, Nuveen.)

Regulators cap leverage for CEFs at 33%, and you can see that four of these CEFs use leverage of 20% to 33%.

• however, their track records indicate they use it safely
• Most CEF total returns are derived from net yield, so this is a good proxy for future total return potential.

A Closer Look At These CEFs

Let's go in order of highest Morningstar rating.

• Morningstar ratings are based on historical volatility-adjusted returns Vs. Peers
• the silver, bronze, and gold ratings (not available for CEFs) are based on Morningstar's assessment of the things like management quality, strategy, and fees.

Cohen & Steers REIT and Preferred Income Fund (RNP) 5 Star Morningstar Rated

Step one in assessing CEF safety and quality is understanding what it invests in.

Investment Objective

The Fund seeks to achieve its objectives through a portfolio of income-producing common stock issued by REITs and preferred and other debt securities. Under normal circumstances, at least 80% of the Fund's total assets will be invested in common stocks issued by REITs and preferred securities. The Fund's investments in contingent capital securities (sometimes referred to as CoCos) and convertible preferred securities, which are types of hybrid preferred securities, are considered preferred securities for this 80% policy purposes." - Nuveen CEF Connect (emphasis added).

RNP, as its name implies, invests in real estate investment trusts ("REITs") and preferred shares.

This CEF pays a monthly distribution and uses a managed distribution, meaning paying out a fixed amount for long periods.

• capital gains and leverage are used to allow for sustainable yields
• for unsafe CEFs, destructive return of capital is used to trick investors into thinking the yield is attractive when it's unsustainable.

RNP tracks its NAV/share relatively closely.

(Source: CEF Connect.)

RNP, like many CEFs, is thinly traded, with just $2.6 million in daily volumes.

• use limit orders

RNP uses 33% leverage to help generate its high yields.

Expenses for CEFs tend to be high due to both active management and interest costs.

• Margin costs for CEFs are around 3% to 4% compared to 5+% for even the largest retail investing accounts.

This diversified CEF has 46% stocks, 25% bonds, and 26% convertible and preferred debt.

Its top stock holdings are blue-chip REITs, including the highest rates names in the DK and iREIT databases.

45% of the bond portfolio is junk bond rated or not rated.

These are mostly long-duration bonds, which fit with the REIT focus.

• and should rally as rates come down quickly in a recession.

A 100% U.S.-focused CEF.

RNP has a mostly stable track record of income. But during the Great Recession, it began paying quarterly dividends resulting in an effective dividend cut.

DNP Select Income (DNP) 4-Star Morningstar Rating

Investment Objective

The primary investment objective is current income and long-term growth of income. Capital appreciation is a secondary objective. The Fund primarily invests in a diversified portfolio of equity and fixed-income securities of companies in the public utilities industry. Under normal market conditions, more than 65% of the Fund's total assets will be invested in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services. " - Nuveen CEF Connect (emphasis added).

This CEF focused on infrastructure, providing stable cash flows from utilities to generate a generous and stable monthly distribution.

This CEF pays a monthly distribution and uses a managed distribution, meaning paying out a fixed amount for long periods.

• the distribution hasn't changed in 20 years
• good for dependability but not good in terms of no income growth.

The CEF trades at a 12% premium to NAV.

DNP has historically traded at a premium to NAV since its inception in 1987.

• one of the oldest and most trusted CEFs for monthly income.

DNP, like many CEFs, is thinly traded, with just $6 million in daily volumes.

• Use limit orders.

DNP uses 27% leverage to help generate its high yields. Over time, its long age and success have grown assets to $3 billion.

DNP's fees are below average for CEFs, and much of its expenses are from interest costs.

This is a conservatively run hedge fund with 112% equity exposure.

This is a hard asset CEF, with nearly 100% exposure to utilities, midstream, REITs, and telecom.

Its top stock holdings are blue-chip utilities.

96% of the bond portfolio is investment grade, and 42% is A-rated.

These are mostly shorter-duration bonds.

A 94% North America-focused CEF.

DNP has a 28-year track record of stable income.

• An aristocrat by CEF standards.

BlackRock Utility, Infrastructure & Power Opportunities Trust (BUI) 4-Star Morningstar Rating

Investment Objective

Investment objective is to provide total return through a combination of current income, current gains and long-term capital appreciation. The Trust seeks to achieve its investment objective by investing, under normal market conditions, at least 80% of its total assets in equity securities issued by companies that are engaged in the Utilities, Infrastructure and Power Opportunities business segments anywhere in the world and by employing a strategy of writing (selling) call and put options. " - Nuveen CEF Connect (emphasis added).

This CEF focused on infrastructure but also uses options strategies to generate income.

• As opposed to leverage.

This CEF pays a monthly distribution and uses a managed distribution, meaning paying out a fixed amount for long periods.

• the distribution hasn't changed since 2012
• when adjusted for conversion to monthly payouts in 2014.

The CEF trades at NAV.

BUI has historically traded close to NAV, at least since 2016.

BUI, like many CEFs, is thinly traded, with just $1.2 million in daily volumes.

• Use limit orders.

BUI uses no leverage, but its relatively young age means smaller assets, though BlackRock isn't likely to shut it down since it's profitable and sustainable.

BUI's fees are very low for a CEF, thanks to BlackRock's economies of scale.

A pure equity CEF.

A relatively more diversified portfolio including technology, industrials, and basic materials.

Some international exposure also, with 56% in the U.S. and Canada, 35% in Europe, and 5% in Asia.

Some high-quality hard asset stocks, including NEE and TRP, and industrials like WM.

BUI has a 10-year track record of stable income.

• No dividend cuts ever, when adjusted for the shift to a monthly payout in 2014.

Reaves Utility Income (UTG): 3-Star Morningstar Rating

Investment Objective

To provide a high level of after tax income and total return consisting primarily of tax-advantaged dividend income and capital appreciation by investing at least 80% of its total assets in the securities of domestic and foreign companies involved to a significant extent in providing products, services or equipment for (i) the generation or distribution of electricity, gas or water (ii) telecommunications activities municipal services or (iii) infrastructure operations, such as airports, toll roads and municipal services. The remaining 20% of its assets may be invested in other securities including stocks, debt obligations and money market instruments as well as certain derivative instruments in the utility industry or other industries." - Nuveen CEF Connect (emphasis added).

One of the few after-tax income and total return-focused CEFs.

Like most safe CEFs, this is a managed distribution policy.

• uses leverage, cap gains, and options to help pay a stable distribution each month.

The CEF trades at NAV.

UTG has tracked NAV very closely since 2017.

• in normal economic times, there should not be a premium or discount
• note that the assets themselves might be overvalued
• paying NAV for a CEF doesn't necessarily protect against overvalued stocks.

UTG, like many CEFs, is thinly traded, with just $7 million in daily volumes. This is the highest daily volume of any of these CEFs.

• Use limit orders.

Like all of these CEFs, it's operated by one of the most respected names in infrastructure asset management.

• Reeves Asset Management was founded in 1961
• they wouldn't still exist if they hadn't done right by investors for the last 61 years.

UTG uses 20% leverage to help generate its high yields. Over time, its long age and success have grown assets to $2 billion.

UTG has the lowest management fees and surprisingly low interest expenses.

A leveraged long infrastructure stock portfolio.

Mostly utilities and telecoms with a bit of real estimate, industrial, and a handful of midstream.

95% U.S. and Canada, with 5% German and Italian companies.

Mostly blue-chip utilities with a concentrated portfolio and modest annual turnover.

UTG has an 18-year track record of generally dependable and even slowly growing income.

Cohen&Steers Infrastructure Fund (UTF) Not Rated By Morningstar

Investment Objective

The Funds objective is to achieve total return, with an emphasis on income. Under normal market conditions, the Fund will invest at least 80% of its managed assets in securities issued by infrastructure companies, which consist of utilities, pipelines, toll roads, airports, railroads, ports, telecommunications companies and other infrastructure companies. " - Nuveen CEF Connect (emphasis added).

An infrastructure fund focused on the most stable cash flows.

One of the few CEFs that pay its distribution purely out of income generated by its assets.

• options, or capital gains.

The CEF trades at NAV.

UTF has tracked NAV very closely since 2017.

• in normal economic times, there should not be a premium or discount.

UTF, like many CEFs, is thinly traded, with just $4 million in daily volumes.

• Use limit orders.

Like all of these CEFs, it's operated by one of the most respected names in infrastructure asset management.

UTF uses 30% leverage to help generate its high yields. Over time, its long age and success have grown assets to $2.2 billion.

UTF has the highest fees, about 45% of which are interest costs.

An 80% stock and 20% fixed income portfolio.

About 30% of the fixed income allocation is junk bonds, and 70% are investment-grade bonds.

Utilities, industrials, midstream, and real estate.

A globally diversified CEF with modest exposure to Asia and emerging markets.

Some of the best hard asset companies on earth, including some of our favorite utilities, midstreams, REITs, and railroads.

UTF switched to quarterly payouts following the Great Recession, resulting in a significant income decline.

Historical Return Data

Past performance is no guarantee of future results. Still, studies show that blue chips with relatively stable fundamentals offer predictable returns based on yield, growth, and valuation mean reversion over time.

Over statistically significant periods, we can say with as much as 97% confidence that certain investment strategies and companies will keep generating good results over the long-term.

• I am including XLU, ENB, and BTI as benchmarks for these CEFs.

(Sources: JPMorgan, Bank of America, Princeton, Fidelity, RIA.)

So, let's look at how each ETF has done historically since its inception, including dividend growth dependability.

Total Returns Since 2004

Very solid returns, though volatility that's far above what you might expect from utility-focused funds due to their use of leverage.

Very dependable income growth...if you reinvest the dividends.

Historical Returns Since 2011

Solid returns over the last decade, though BUI's current bear market, has hurt returns. The rolling returns smooth out the bear market and show both are dependable sources of long-term returns.

Very dependable income growth if you reinvest the dividends.

Bottom Line: These 5 CEFs Are Great Options For Conservative Income Investors, But There's A Catch

There is much to like about DNP, UTG, UTF, RNP, and BUI.

• generally dependable income (outside of the Great Recession)
• generous monthly yield
• actively managed by some of the most trusted and reputable hard asset managers on Wall Street.

But, on Wall Street, there is only one free lunch, diversification.

• Preparing For Recession Part 11: The Importance And Power Of Diversification .

There are significant downsides to investing in CEFs, even safe ones like these five.

• distributions are a mix of short and long-term capital gains and sometimes returns of capital (though no K1 tax form)
• higher turnover due to active management (can be tax inefficient)
• even if the CEF is trading at NAV, the assets themselves can still be overvalued
• leverage can result in much higher volatility than you'd expect from utility-focused investments
• dividends don't tend to grow because capital gains are being used to pay the generous yield
• low liquidity, so you might not be able to get money in and out quickly.

Speaking of dividends, it's important to remember the benefits and costs of not reinvesting dividends.

• The total returns you see quoted always include dividend reinvestment.

DNP Returns Since February 1987 No Dividend Reinvestment

Inflation-Adjusted Returns (No Dividend Reinvestment)

(Source: Portfolio Visualizer Premium.)

If the payouts are constant over time and you take your return in cash, you can't expect to enjoy the same income as a dividend growth blue-chip can deliver.

Can I recommend these five CEFs as a part of a diversified and prudently risk-managed portfolio? Yes.

Are they among the safest sources of monthly income on Wall Street? Yes.

But should you rely only on safe CEFs like this for retirement? Probably not.

Remember that a diversified and prudently risk-managed portfolio will pay dividends throughout the quarter, usually every week or two.

You can build your high-yield monthly paying CEF by combining the world's best high-yield blue chips, not even necessarily just hard assets like REITs, utilities, and midstream.

• Any very safe high-yield blue chip can contribute to a monthly paying income portfolio.

And unlike CEFs, where the focus is 100% pure yield and payouts don't grow over time, you can achieve both very safe, generous monthly yield AND dividend growth over time, allowing you to match sector benchmarks and even exceed them.

For further details see:

Five 7+%-Yielding Monthly Paying Retirement Dream Stocks