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Previously, I presented an exercise to generate a diversified, income portfolio yielding more than 10% that carries moderate risk for that level of yield.

The portfolio comprises 20 positions, the bulk of which are closed-end funds.

Here in part 2, I discuss the component positions.

In the first entry of this two-part series (found here), I introduced results of an exercise to generate a model for a diversified, high-income portfolio. The objective was to generate yields exceeding 10% combined with reasonable expectations for capital preservation. The incentive was to explore the prospects for high-income yield for retirees or other incomeinvestors in today's low-yield environment.

Many recent and soon-to-be retirees are or will be facing income shortfalls. This is an environment that will lead to yield chasing -- all too often ill-considered yield chasing. My incentive was to see if I could put something together that generates high income while tamping down some of the high risk associated with it.

As I noted repeatedly in that article as well as in my other writings on this subject, high yields necessarily come with high risks. A key goal of the exercise was to moderate those high risks. I refer you to the data presented in Part 1 for insights into how effectively this may have been accomplished. I'll just note two points here. First, Daily Value at Risk for the entire portfolio stands at 1.1%. Compare that to the S&P 500 whose Daily VaR is 1.5%. And second, portfolio beta is only 0.54%; all but one of its high-yielding components clock in at betas below 1%.

The portfolio, which I'll call the Double Digit Distribution Portfolio, or DDD, holds 20 positions. It is built primarily on closed-end funds, most of which have yield percentages in the high single digits. In Part 1 I included a brief discussion of the nature of CEFs for those new to the category. I've also put together a set of articles exploring some key aspects of CEFs, here, here and here. The primary incentive for taking on this exercise grew out of some of the comments received in those articles.

In the DDD portfolio, the top four holdings by weight comprise a third of its value. These four are the engine driving the portfolio's yield above 10%. The remaining 16 positions supplement this yield while providing stability through diversification.

In this Part 2 of the series, I will discuss each of the holdings, giving a bit of an overview on why I like them and how they contribute to the goals at hand.

I refer you again to Part 1 to get a sense of my view that the whole is more than the sum of its parts. I mention that up front because there will be individual positions that some readers will not like. As always, I welcome any objections and alternate ideas, but I'd ask that you keep in mind the whole when approaching any of its parts. If there's something you don't like here, by all means let us know. But consider that the most useful critiques will provide an alternative that fits the overall model, filling the niche left open by eliminating the offending position.

Double-Digit Distribution Portfolio

So let's start by listing the parts and reviewing the portfolio composition. First a list of the holdings and their symbols:

Awilco Drilling Ltd (OTCPK:AWLCF)

BlackRock Multi-Sector Income (NYSE:BIT)

Blackrock Ecosolutions Investm (NYSE:BOE)

BlackRock Global Opportunities (NYSE:BQR)

ETRACS Monthly Pay 2xLeveraged Closed End Fund (NYSEARCA:DVHL)

Stone Harbor Emerging Markets (NYSE:EDI)

EV Enhanced Equity Income II (NYSE:EOS)

EV Tax-Managed Buy-Write Opps (NYSE:ETV)

Flaherty & Crumrine Preferred Securities (NYSE:FFC)

GAMCO Glb Gold Natural Res (NYSEMKT:GGN)

H&Q Healthcare Investors (NYSE:HQH)

Nuveen Real Asset Inc & Growth (NYSE:JRI)

Voya Global Adv & Premium Opp (NYSE:IGA)


AllianzGI NFJ Div Int & Prem (NYSE:NFJ)

Oxford Lane Capital Corp (NASDAQ:OXLC)

PIMCO Dynamic Credit Income (NYSE:PCI)

PIMCO Dynamic Income Fund (NYSE:PDI)

Columbia Seligman Premium Tech (NYSE:STK)

Tortoise Energy Infrastructure (NYSE:TYG)

And, the portfolio weights and yields for these positions (source: InvestSpy's portfolio calculator):

(click to enlarge)

DDD Portfolio Constituents

I'll discuss here the components of the DDD portfolio. I've considered several of these in previous articles on Seeking Alpha, and I'll cite references to articles where I've done so. Keep in mind that several of those prior reviews presented what I viewed as timely opportunities, opportunities that may not exist any longer.

I'll also include brief discussions of some of the issues and categories that merit attention in the summary of the first name where those points arise.

AWLCF is a widely reviewed stock on Seeking Alpha, as a quick search on the ticker will show. In broader investing circles, however, it seems to be largely unknown. Indeed, several of the large brokerages list it as paying no dividend at all. Well, it does in fact pay a dividend and a quite handsome one at that. The company owns two drilling rigs in the North Sea. Both are booked to capacity at increasing rates for the near future. Both will be coming off-line for scheduled maintenance beginning early in 2015, which may temporarily interrupt the dividend flow. Anxieties over a potential drop in the dividend have led to a downward move since the mid-August ex-dividend date. Some consider this a great buying opportunity; others disagree.

The company is based in the UK and its primary listing is on the Oslo Bors. Being based in the UK means no foreign taxes are withheld for the U.S. investor. It does, however, make trading the stock a bit difficult. Some large brokers (Fidelity, Schwab and Vanguard that I know of) attach a $50 per transaction fee to any trade. Others have lower charges ($15 at TD Ameritrade for one), and some of the more aggressive, trader-focused brokers (Etrade, MerrilEdge and ScottTrade, I'm told but have not verified) apply none at all.

The company is widely praised for its shareholder-friendly management. Management are also major shareholders themselves. There is no reason to believe the dividends will suffer anything more than a brief setback should the maintenance downtime lead to a drop. In that event I would expect a return to regular, and regularly increasing, dividend payouts.

As I mentioned, the stock is widely covered here at Seeking Alpha. My recent article can be found here, and a search on the ticker will turn up several more comprehensive articles.

BIT is a highly leveraged (40%), closed-end fund in the multisector income category. It invests in global debt and its 1-year performance is solidly ahead of its category. In Part 1, I discussed leverage and noted that a reasonable path to high-yield in the current low-rate environment will run through levered holdings. In essence, this approach takes advantage of the low rates. So, I've included a large number of leveraged holdings in the portfolio, primarily in the fixed-income categories.

Some will blanch at the inclusion of so many positions levered at 25%, 33%, 40% or even 50%, but I submit that this is the only way to achieve the goal of double-digit returns. Obviously one must approach leverage cautiously and selectively, especially since it may not always provide the performance gains it promises (see this Seeking Alpha article and this one for details).

I'll add, too, that I've chosen to minimize exposure to leveraged equity funds. I'll discuss this more fully as we get into the next entry covering the first of the equity holdings.

BOE is a global option-income closed-end fund. It is one of several option-income funds included in this portfolio, so let's take a moment to discuss them as a group.

I consider option-income CEFs to be a strong category for equity income investing. The category is populated primarily by non-leveraged funds, which tend to be highly tax efficient.

Some readers who fail to understand the nuances of closed-end funds will object to the relatively high levels of return of capital typical for the distributions of these funds. This is not the place to discuss this item in detail, but suffice it to say that non-destructive return of capital is not only not a negative, it is a positive come tax time. RoC income is deferred until the fund is sold, at which time it is considered capital gains and taxed at the capital gains rate if the fund was held more than a year. This is a better tax situation than one gets from doing one's own option-income investing. The tax advantages are such that managers of these funds will strive to increase distributions comprising RoC.

Recent discussions of option income funds can be found here, here and here. My research on leveraged vs. non-leveraged equity CEFs has led me to the conclusion that leverage often does not provide the returns one might expect, especially among equity funds.

For these reasons, I've chosen to populate the equity allocation of the portfolio with an emphasis on option-income CEFs. This gives up some potential for capital gains in strongly up-trending markets, but overall leads to less volatile price movements and more dependable income than one should expect from leveraged equity funds.

BQR invests in eco-conscious holdings. Water, alternative energy and agriculture are the linchpins of its portfolio. It is another option-income fund.

BQR has underperformed the broader equity categories in recent years, but provides relatively uncorrelated exposure to equities compared to the rest of the equity components. I also consider that the investment philosophy is sound, but the sector is out of favor. If one anticipates, as I do, a reversal here, I think BQR will see enhanced performance going forward.

DVHL is one of two leveraged, income ETNs from ETRACS that I've included in the portfolio. DVHL is the most widely diversified product in ETRACS' line up of leveraged income offerings. When I began this exercise I planned to use ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL) (which covers a spectrum of closed-end funds) for this core position, but realized I was replicating too many holdings, so switched to DVHL.

Some regular readers may recall that I have some issues with DVHL (documented here), but many others disagree with my stated objections. "Why," you may ask, "include it if you don't really like it?" Fair question.

To start, it meets the portfolio's goals. I wanted a broadly diversified, leveraged product here to add some yield. DVHL is certainly diversified (discussed here), and with its 2x leverage, it does kick out some attractive distributions (12%-14% depending on how and when one calculates the yield). And it's not as though I dislike it that intensely.

My objections center around tax issues. Basically the fund holds numerous tax-advantaged holdings. These holdings, muni bonds especially, are priced with consideration to their tax advantages. As a credit instrument, the fund provides none of those advantages to its investors. It's not so much the tax-disadvantaged status of the ETN that I object to, it's the fact that one is overpaying for the components when one foregoes their tax-advantaged status. These objections are real and valid, but in the interests of the goals of this exercise, I've decided to hold my nose a bit and jump in anyway.

Having said all that, this is a solid product, well diversified and paying attractive income. I do not hold it myself, but I understand its appeal to those who do.

EDI is invested in emerging market debt. It carries 31% leverage. It's had its good and bad years as emerging market debt moves in and out of favor. Most recently its NAV has solidly outperformed its category, although price has lagged leading to a growing discount currently at -7.02%, somewhat lower than the mean value. It's here for the obvious reason of providing exposure to emerging market debt.

EOS is another covered-call equity fund. It covers the US domestic market and has consistently outperformed its category since its inception. The fund is heavy in technology, industrials and telecom.

ETV is a bit more of the same, but more so. It is a domestic-equity, option-income fund. By any measure, ETV is one of the strongest funds in the option-income category, and has been over a quite long timeframe. It's a favorite holding for many CEF investors.

The fund's excellent performance has driven its price to premium valuations, currently at 0.8% compared to a discount as low as -8% as recently as 8 months ago. I'm not sure it would be a timely buy at this premium, but I would certainly buy more if the discount returns.

FFC is a closed-end fund in the preferred shares space. It holds 80% of its preferred share position in investment-grade issues and carries 33% leverage. Preferred shares are, in my mind, a key component of an income portfolio, but it is difficult for an individual to compete with a specialized manager in this arena. Leverage and hedging can be important considerations in driving attractive, sustainable yields from preferred stocks. These are difficult tools for an individual investor to master and manage, so it's my view that one does better turning this category over to experts.

FCC is currently priced at a relative bargain with a discount well below its usual valuation. In preparing this series, this fund in particular caught my eye. I submitted a piece on it pointing out what I see as some of its excellent qualities. You can read that article here.

GGN holds positions in the area of gold and natural resources, and generates income using an option-income strategy. It is leveraged at 8.22%. It is marked by periods of volatility typical of its market niche. YTD performance has been excellent. Its premium of about 2.5% has been holding since early in the year when the strong recent turn-up became evident to investors. The fund is 75% US and 25% global in scope. It adds to the portfolio by providing exposure to the non-energy, resources sector.

HQH is one of my favorite closed-end funds. The fund is invested in healthcare, especially in the biotechnology arena, which I consider will continue as one of the best-performing sectors for the near future and beyond. I've discussed this fund, along with its sibling HQL, in the past here. The fund pays quarterly distributions pegged to 2% of NAV. It is unleveraged. It is the most volatile component of the portfolio according to the InvestSpy analysis presented in Part 1.

The fund had a recent rights offering that increased its size by a third. The current discount of -3% dates to around the time of that expansion and, in my mind, presents a reasonable entry point. Especially when one considers that there was a premium of >6% as recently as May, which I fully expect to return as the hangover from the expansion passes.

IGA is a global (55% US), covered-call equity fund. It performs consistent with its category, and is currently paying 9.1%, near the top of the category.

JRI is a global, closed-end, real-estate fund. It is levered at 28%. It has been an outstanding performer in its category since its inception. I debated whether to restrict the portfolio to this single real estate holding or to also include one that was strictly domestic US. I ultimately came down on the side of only one. JRI sells at a -7% discount and has seen some recent compression of that discount.

MORL is another 2x leveraged ETRACS-UBS ETN that is covering mREITs. I debated as to whether or not to include MORL here as I have a bit of a knee-jerk negative response to the mREIT space. But mREITs are a key player in a high-yield portfolio, so I went with it, albeit without a high level of conviction. The ETN has many staunch advocates here at Seeking Alpha. If you're unfamiliar with MORL, I strongly suggest a quick search of the site for vast amounts of information, both pro and con. MORL is the highest-yielding position in the portfolio, generating an income yield greater than 20%.

NFJ adds more global, option-income, equity exposure along with 25% convertible securities. It has a 9.53% yield return. It is another option-income fund that has moved from a perennial discount to a premium valuation in recent weeks. The last time NFJ was in premium territory was for a brief period in 2006. Its portfolio is heavy with blue-chip, dividend aristocrat type stocks.

OXLC is another favorite of mine. This fund is a bit of a hybrid between a traditional closed-end fund and a BDC. Its bailiwick is collateralized loan obligations, which are highly leveraged and high yielding. The management has been fairly tight with information, although authors here at Seeking Alpha have done a lot to clarify the mysterious ways of Oxford Lane. The fund recently had a rights offering that was fully subscribed and expanded its size. I discuss OXLC here and refer any interested reader to Seeking Alpha author Steven Bavaria's writing on the name.

PCI is the first of two PIMCO fixed-income funds. Its $3,193M AUM places it as the third largest closed-end fund according to The fund is slightly more than a year old and has turned in appealing performance stats in that time. There was an initial decline in its market price shortly following its IPO, something that is typical of newly introduced CEFs, and the fund has sold at a discount ever since. PCI's managers have a broad brief, but have been primarily invested in high-yield corporate and asset-backed bonds. It's leveraged at 28%, which is a modest level for a high-yield, fixed-income fund.

PDI is a slightly older sibling of PCI. It's about 40% the size of PCI. PDI has been much more volatile in its young life, moving between premium to discount valuations on more than one occasion. It is currently priced at a -2.7% discount, which could be seen as a good entry point. The fund is heavy in mortgage-backed securities and carries outsized leverage (47.2%).

STK is another of my personal favorites. It is another US equity covered-call fund. It differentiates from other funds of the category in being focused on technology stocks. I began reporting on the fund about a year ago when it was paying close to 13% with a -7.6% discount (see here and here for details). The discount has compressed to the extent that there have been brief flirtations with premium valuations. It's currently at -2.5%. The fund has had a bit of an erratic performance history, but has turned in solid numbers for the recent past.

TYG rounds out the portfolio. This closed-end fund covers the MLP sector. It carries 25% leverage. Its present configuration grew from a merger of several Tortoise funds into TYG, so historical performance stats are not completely relevant. The fallout from the merger led to a decline in TYG's valuation, moving from its perennial premium to a discount, currently at -6.6%. Tortoise is a strong player in the MLP space, and I consider the merger to have been a neutral to good move. If I were shopping, I would be looking closely at buying TYG at its large discount before it disappears again. It is the only MLP holding in the portfolio (other than what is in DVHL), so I allocated a slightly larger portion to it.


Let me take the opportunity once again to remind readers that these funds comprise a portfolio. One needs to look at them in terms of the contributions to the goals and objectives of that portfolio rather than as individual holdings.

To bring this into focus take a look at the asset allocation chart, correlation matrix and portfolio stats for the portfolio in Part 1 of this series (linked in the introductory paragraph).

Finally, I remind readers that nothing here constitutes investment advice. I am an individual, retired investor with no professional expertise in investment advice. I am simply passing along results of research conducted for my own information. If there is anything here intriguing to you, you will, of course, want to do your own due diligence to determine the appropriateness for your own goals and situation. This point is especially important here when the discussion is on riskier, high-yield positions.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.