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In Part I, I discussed and presented portfolios for Type 1 and Type 2 strategies. In Part II, Type 3 and Type 4 were discussed. Part III is the final installment and will examine Type 5 and Type 6 strategies. Readers who have not read Part I, please start there, since it contains important information necessary in order to better follow the rest of the article.

The Six Types

  1. Income Investing (High / Very high current yield; lower DGR)
  2. High Yield Investing (Very high current yield; lower DGR)
  3. High Growth Investing (High / Very high DGR; lower current yield)
  4. Long Term Growth Investing (Mid-range current yield; mid-range DGR)
  5. Dividend Diversity Investing (A combination of the first four types)
  6. Income Through Funds Investing (Very high current yield through funds)

The Definitions

For the purpose of this article I use the following ranges as a guideline for dividend yields and growth rates. However, these limits are not absolute and will be liberally crossed on either side when otherwise desirable or appropriate.

Low

Mid-Range

High

Very High

Dividend Yield %

2.00 - 2.99

3.00 - 4.99

5.00 - 6.99

7.00+

Dividend Growth Rate %

0 - 10

11 - 19

20 - 29

30+

Type 5 - Dividend Diversity Investing (A combination of the first four types)

The Dividend Diversity Investing Strategy, is a broad-minded, free-thinking strategy. It keeps all options open. The argument for this strategy is; why should investors limit themselves to some arbitrary restrictions? Hence, the best way to go is to diversify among all different kinds of dividend stocks-- from the super-high yielders down to the low yield, high growers. Ultimately, a well diversified dividend portfolio will weather the down markets better, and in the long run will outperforms most specialized portfolios.

In constructing the portfolio for this strategy I selected some of the best stocks from each of the previous portfolios. They include the dividend stalwarts Lockheed Martin (NYSE:LMT), Intel Corporation (NASDAQ:INTC), and ConocoPhillips (NYSE:COP); the high yielders Telefonica (NYSE:TEF) and Omega Healthcare Investors, Inc. (NYSE:OHI); and the high growers BHP Billiton PLC (NYSE:BBL) and Darden Restaurants, Inc. (NYSE:DRI).

Dividend Diversity Portfolio

Data as of close Friday, 12/16/2011

Sym

$ Price

%

Dividend

Yield

P/E

Forward

% ROE

5 Year

Avg.

Price/FCF

5 Year

Avg.

$ Mil

Market

Cap.

Potency

Score

TEF

16.63

12.77

7.56

42.79

10.20

84,163

27.66

OHI

19.00

8.69

20.50

11.39

13.59

1,812

8.65

AZN

45.58

5.92

6.26

39.32

10.20

59,293

19.25

MO

29.14

5.71

13.41

57.79

14.74

57,873

17.79

LMT

77.10

5.24

9.95

56.51

11.89

24,810

28.86

DRI

43.68

3.99

11.17

24.03

17.33

6,276

23.08

RCI

35.45

3.95

11.10

24.38

20.21

19,345

24.20

COP

68.40

3.85

8.72

7.77

22.69

97,388

9.02

INTC

23.23

3.60

9.58

16.06

17.60

124,057

14.32

BBL

57.15

3.53

6.76

36.75

15.62

168,665

16.18

For a more Aggressive

Portfolio switch in:

For a more Conservative

Portfolio switch in:

TCAP

CL

NLY

MCD

Type 6 - Income Through Funds Investing (Very high current yield through funds)

The Income Through Funds Investing Strategy is different from all the other strategies I've offered in this article in that it is designed for those who don't want to deal with individual stocks. The investors who were badly burned by the 2008-09 crash when some of their once great dividend stocks crashed and burnt undoubtedly don't want to see anything close to a repeat of that again.

The argument for the strategy of a funds-only portfolio is rather compelling; no amount of dividend can compensate for losing 80% or more of your investment in a stock due to a black swan event.

I designed a portfolio with the above mentioned investors in mind as well as anyone who is primarily looking for generating a fairly high and stable income. The portfolio is composed only of Closed-End Funds (CEFs). I did consider ETFs as well, but generally, ETFs are less suitable for this purpose since they don't provide the same level of high distributions (monthly or quarterly,) or the same distribution stability that CEFs are designed to provide. Please note that for the purpose of this article I excluded mutual funds from the outset, so that's why I have not referenced them.

Readers can find more information on CEFs on the Internet than they ever need, so I won't get into that, but I will highlight three of their characteristics I consider crucial, as well as the three common investment strategies they use to boost income.

Premium/Discount

The first is the premium/discount of their trading price relative to their NAV, or net asset value. The price of CEFs, unlike ETFs, can get extremely out of whack with their NAV, which is their actual net worth. The gap between the two can grow illogically large, even to extreme levels of over 100%, for no good reason. In fact, I argue there is never a good reason to buy a CEF at a premium.

Patient investors can profit from this unique market inefficiency (see note [1] below) by buying solid, reputable CEFs at times when they are priced at a large discount to NAV and sell when the price moves into premium. This sounds like a simple strategy, but if not chosen carefully you could be looking at dead money for a long time. So you want to buy at a discount only the CEFs that you are planning on holding for a long time, not just because a CEF is at a big discount. And I would never buy a CEF that is not at a discount of at least 3%.

Note [1]: Unique since it's so well known, therefore it shouldn't be inefficiency.

Return of Capital (ROC)

The second important characteristic is that a chunk of the distribution paid out by most income CEFs, is simply return of capital. In many funds sometimes 80%-90% or even more of the reported distribution (also referred to as dividend or yield,) is simply return of capital. This is not necessarily a bad thing in itself, since it is used for favorable tax management as well as helping the fund managers keep the distribution rate steady while the fund performance may be choppy. But investors must pay close attention to the level of earnings and capital gains that the fund is producing on its investments.

Leverage

The third important feature is the level of leverage a CEF employs. The higher the level, the riskier the CEF. In a bull market it could improve performance, but in a bear, it's often a major drag. For this portfolio I have picked some great overall funds that achieve solid performance with lower risk, since I've chosen only zero leverage funds. More aggressive investors can utilize the two alternative, leveraged CEFs that I have provided to further perk up the portfolio.

The Three Strategies

In general CEFs use three basic strategies to boost their gains:

1. Options income strategy (also referred to as Covered-Call or Buy/Write funds)

2. Leverage strategy (use debt for leverage)

3. Dividend harvest strategy (buy a dividend stock prior to ex-dividend date, sell shortly after)

They pass on the gains, if any, most often supplemented by some amount of return of capital, to their shareholders as high-rate distribution. I should emphasize that just because CEF managers use these strategies to boost gains and some even name their fund based on the strategy, it does not mean they always succeed. Just as many lose money utilizing these strategies as those that gain.

Income Through Funds Portfolio

Data as of close Friday, 12/16/2011

Symbol

Price

Distrib-ution

Rate %

Premium/

Discount

1-Month Avg. %

Expense

Ratio

Distrib-ution

Frequ-ency

Managed

Distrib-ution?

BOE

13.27

16.11

-10.14

1.10

Q

N

IGD

8.73

13.05

-4.36

1.07

M

N

ETY

8.62

12.88

-16.45

1.07

Q

Y

CII

12.06

11.41

-10.99

0.93

Q

Y

ETW

10.23

11.38

-14.94

1.09

Q

Y

ETV

11.63

11.25

-14.23

1.07

Q

Y

NFJ

16.06

11.04

-7.35

0.97

Q

N

ETB

12.15

10.37

-15.08

1.12

Q

N

JSN

11.18

9.47

-10.92

0.75

Q

Y

DPO

9.99

8.25

-6.18

1.06

Q

N

For a more Aggressive

Portfolio switch in:

For a more Conservative

Portfolio switch in:

SLA

JLA

DEX

JPZ

In the table, Q is for quarterly; M is for monthly; Y for yes; N for no.

Symbol

CEF Name

BOE

BlackRock Global Opportunities Equities

IGD

ING Global Equity Dividend and Premium Opportunity Fund

ETY

Eaton Vance Tax-Managed Diversified Equity Income Fund

CII

BlackRock Enhanced Capital and Income

ETW

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund

ETV

Eaton Vance Tax-Managed Buy-Write Opportunities

NFJ

NFJ Dividend, Interest & Premium Strategy

ETB

Eaton Vance Tax-Managed Buy-Write Income

JSN

Nuveen Equity Premium Opportunity

DPO

Dow 30 Enhanced Premium & Income

SLA

American Select Portfolio

DEX

Delaware Enhanced Global Dividend & Income

JLA

Nuveen Equity Premium Advantage

JPZ

Nuveen Equity Premium Income

Conclusion

In picking the funds for this portfolio I examined hundreds of funds, keeping in mind all the crucial factors I discussed earlier, as well as other key CEF metrics, including past performance, expense ratio, distribution frequency, etc.

And finally I will leave you with the summary of my overall view on CEFs:

There is only one way to play the CEFs. Buy only proven, reputable ones at big discount and sell them at high premium.

Source: 6 Types Of Dividend Investment Strategies, Part III

Additional disclosure: I may initiate a long position in one or more of the stocks discussed over the next 72 hours.