The 7% $100,000 CEF Portfolio For The Retiree: 12 CEFs Along With A Suggested Method Of Purchasing Them

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Includes: BTO, ETO, FIF, HQH, HQL, HTD, HYB, IYH, JTD, RFI, RNP, UTF, UTG
by: Henry Nyce

Summary

This is the 14th article in the series of putting together a 7% CEF portfolio that also protects against capital loss.

Twelve CEFs have been back-tested 5 years that offer the retiree 7% cash returns and capital maintenance.

I suggest a method for putting together this 7% portfolio to minimize capital losses and maximize dividend yield.

Using the research on my past 13 articles (list is here), it is time to assemble the $100,000 retiree portfolio that pays 7% cash dividends with the goal of maintaining capital. Assembling this portfolio should not be done all at once but rather one should take time to allow the market to go through its ups and downs to get a better average price for one's purchases. Since most investors do not have the ability to time the market, it is better to dollar average into the issues being purchased. Follow the example below using JTD, one of the CEFs suggested for this portfolio. The graph for last year and 4 points of suggested purchase are shown. Click to enlarge

Source of Graph: Interactive Brokers Web Site (Arrows & Comments from author)

Instead of purchasing all 400 shares at $16.00 right now, one purchases 100 shares at 4 different times which nets one a $14.25 average price for the 400 shares. By spreading purchases out over a year, it reduces the price by $1.75 for the shares. (100 shares at $15.00, 100 shares at $14.50, 100 shares at $13.00 and 100 shares at $14.50) This method requires no special ability or special timing, but a plan, patience and a discount broker to keep trading costs low.

There is also the issue of selling the stocks already in one's portfolio in order to purchase the new CEFs and ETFs that will compose this portfolio. The market has been reaching new highs for the past several weeks while many companies are showing year-to-year declines in sales and profits. It seems that it may be an ideal time to sell some stocks in preparation for a time when the market takes a breather and goes down for a few weeks. Take this opportunity to raise cash and wait for lower prices before purchasing these issues.

New America High Income Fund (NYSE: HYB) is the bond fund that showed the best results over a 5-year period. Allocating 10% of the portfolio to this bond fund means purchasing $10,000 worth of this CEF over time. Assuming an average price of $8.00 per share, one would purchase somewhere between 1200 and 1300 shares of HYB for the portfolio. To follow the advice of dollar averaging, one could buy 200 shares 6 times over the next year to a year-and-a-half.

The NAV of HYB was $9.44 at the end of June indicating that the fund is selling at an 8% discount with the market price at $8.75 per share. Since the current dividend yields 8.3%, it seems reasonable to make the first purchase of 200 shares now. The graph over the past year is shown below:

Click to enlarge

Source: Interactive Brokers Web Site

Out of all the REIT funds researched, Cohen & Steers REIT & Preferred Income Fund, Inc. (NYSE:RNP) was the first choice and Cohen & Steers Total Return Realty Fund, Inc. (NYSE: RFI) was the second choice. RNP is not a pure REIT fund because it also invests in preferred stocks while RFI is a pure REIT fund exclusively investing in REITs. I prefer RNP over RFI, but decided to split the REIT portion of the portfolio between both of them.

Since REITs offer the opportunity for capital growth, it seems reasonable to put 15% or $15,000 of the portfolio into REITs. The annual graphs for both of these funds are displayed below.

Click to enlarge

Source: Interactive Brokers Web Site

Click to enlarge

Source: Interactive Brokers Web Site

Both of these funds are currently selling near their yearly highs and one needs to watch these issues for a month or two to catch a price break before jumping in with the first purchase. It is important to note that RNP is selling at 13% discount to NAV, indicating that the price of REITs has been rising lately. Here again, one would be wise to follow a pattern of buying in 100 share lots by alternating purchases every 2-3 months between these 2 funds until one reaches the $15,000 level and take 18 months to complete this strategy.

The utility fund that performed the best over the 5-year period was Cohen & Steers Infrastructure Fund, Inc. (NYSE: UTF) and the next best fund was Reaves Utility Income Fund (NYSEMKT:UTG). Here again, the suggestion is to put 15% or $15,000 into UTF or UTF and UTG. There may be some advantage at watching both as one accumulates 15% in one's portfolio. There may be buying opportunities for one or the other over a period of a year.

The annual graph for UTF is displayed below.

Click to enlarge

Source: Interactive Brokers Web Site

The graph for the past year for UTG is below.

Click to enlarge

Source: Interactive Brokers Web Site

Just as in all the previous graphs, one can see that both UTF and UTG are at their annual highs. It is probably wise to wait for a price break in utilities before diving into these funds.

The 2 healthcare funds that excelled in returning cash dividends were Tekla Healthcare Investors (NYSE: HQH) and Tekla Life Sciences Investors (NYSE: HQL). These 2 funds were best in returning both dividends and capital gains over the past 5 years. For that reason, this portfolio will apportion 20% or $20,000 of its funds put into these 2 funds. HQH's graph for the past year is shown below.

Click to enlarge

Source: Interactive Brokers Web Site

This graph shows that HQH is not anywhere near its 52-week high. It is almost $10.00 below the high for the past year, and so it is an ideal time to start investing in this CEF. Even though it is near the lows for the year, it still would be wise to ease into the fund throughout the year. The next graph displays the market price of HQL for the year.

Click to enlarge

Source: Interactive Brokers Web Site

HQL's graph shows a greater percentage difference between the high and low for the year than HQH. From a high of over $30.00 to the current price of $18.50, this fund has lost more than 1/3 of its market price over the past 12 months. Now appears to be an ideal time to purchase this fund. However, one still should enter the fund throughout the year even though one may buy more shares this quarter than any other quarter. HQL is currently selling at a 2% discount to NAV and HQH is selling at a 1% discount to NAV.

Since both of these funds are managed by the same person, one might want to choose another fund to balance out one's healthcare funds. Both of these funds focus on biotechnology and hold small emerging companies, some of which are not public companies. HQL holds more of these small companies which accounts for the greater volatility evident with this fund. To counteract this volatility, one could split the purchase between HQH and iShares U.S. Healthcare ETF (NYSEARCA:IYH), an ETF that doubled in market price over the past 5 years. Since it only pays 1.8%, one would need to sell stock every so often in order to glean a 7% yield. IYH's graph for the past year is shown below.

Click to enlarge

Source: Interactive Brokers Web Site

This graph is quite different from the other 2 healthcare funds. It is currently selling near its yearly high at $155.00 per share as opposed to the high of $165.00 per share in the middle of last year. If one decides to choose this fund, it will require much more trading in order to extract the cash one needs to live on. The only advantage to purchasing this ETF is one is getting lower volatility and perhaps a somewhat higher degree of safety.

Moving on to energy CEFs, First Trust Energy Infrastructure Fund (NYSE: FIF) was the fund chosen to place in this portfolio. FIF currently sells for $18.00 per share and offers a 7.4% yield. It sells at a considerable discount to NAV of over 10%, but this discount is normal for FIF. The graph for the past year is displayed below.

Click to enlarge

Source: Interactive Brokers Web Site

Given that oil and gas prices have likely seen their lows, 10% of the fund will be poured into this energy CEF over time. When energy prices revive at some time in the future, this CEF should share in the bounty.

John Hancock Financial Opportunity Fund (NYSE: BTO) was the BDC CEF that came closest to fulfilling the requirements for this 7% portfolio. BTO has consistently grown its dividend, NAV and market price and if it follows past behavior, the dividend will grow from its current 5.6% yield within a year or so. BTO's graph for the year is on view below.

Click to enlarge

Source: Interactive Brokers Web Site

The graph demonstrates the high volatility of this fund and so it is important to purchase this fund over an extended period of time. Since BTO is riskier than the other funds, only 5% or $5,000 will be invested in this fund. Currently, this fund is selling at NAV, there is no discount or premium.

Since several of the tax-advantaged CEFs offer 7% or better, are managed to reduce one's tax bill and have very different portfolios, the 25% balance of the portfolio or $25,000 will be invested into several of these funds. Somewhere between 5 and 10% of the portfolio will be allocated to the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (NYSE: ETO). This fund currently pays a 9.6% dividend and sells near NAV. The graph for the past year is shown below.

Click to enlarge

Source: Interactive Brokers Web Site

This fund invests worldwide and contains a huge assortment of stocks from America and around the world. Since this issue is very volatile, one should enter this fund slowly and take plenty of time to accumulate the full proportion of shares. If one is watchful, one could probably buy this fund at a discount to NAV from time to time.

The next graph shows John Hancock Tax-Advantaged Dividend Income Fund's (NYSE:HTD) market price and dividends over the past 12 months.

Click to enlarge

Source: Interactive Brokers Web Site

HTD's market price has run up considerably over the past 3 months, from $20.00 to $25.00 per share. This increase has reduced the yield to around 5.8%, a little less than the 7% goal for this portfolio. However, this CEF has been an outstanding performer over the past 5 years, and should be a key part of this portfolio. This fund should also garner 5 to 10% of this portfolio, and purchases should be made over an extended period of time.

It is likely that the market price of this fund will take a dip over the next 12-18 months, and purchases should begin when the share price is around $23.00 per share. At $23.00 per share, the dividend will yield 6.3%. If it can be purchased lower than that, it will also increase the yield proportionately. Furthermore, HTD's dividend has been constantly growing over the past 5 years and may continue to do so bringing the yield to the 7% goal in the future.

The last fund to add to this portfolio is Nuveen Tax-Advantaged Dividend Growth Fund (NYSE: JTD). A Majority (75%) of the investments are US-based equities with 23% of the fund invested in overseas companies. This fund has done very well over the past 5 years and the market price performance over the past year is posted below.

Click to enlarge

Source: Interactive Brokers Web Site

This graph shows that JTD is also selling near its 52-week high. Again, it is important to spread one's purchases over an extended period of time. While this CEF is offering an 8.4% yield, it appears from the graph that one could probably lower one's purchase price for the fund over time. Allocate about 5-10% of the portfolio to this fund so that the last 3 funds covered here would total about 25% or $25,000.00 of the $100,000 portfolio.

The final $100,000 retiree CEF/ETF 7% portfolio will look similar to the table below after 12-18 months of purchases.

Fund

No. of Shares

Ave Price per Share

Total

Percent of Portfolio

Yield

Fund Type

HYB

1250

$8.00

$10,000

10%

8.3%

Bond

RNP

500

$20.00

$10,000

10%

7.1%

REITs

RFI

400

$13.00

$5,200

5%

7.1%

UTF

500

$20.00

$10,000

10%

7.6%

Utility

UTG

175

$28.00

$5,000

5%

6.5%

HQH

400

$25.00

$10,000

10%

7.8%

Healthcare

HQL

540

$18.50

$10,000

10%

8.0%

FIF

570

$17.50

$10,000

10%

7.4%

Energy

BTO

200

$24.00

$5,000

5%

6.1%

BDCs

ETO

400

$21.00

$8,400

8.4%

9.7%

Tax Advantaged Funds

HTD

300

$22.00

$6,600

6.6%

6.6%

JTD

370

$13.50

$5.000

5%

8.5%

Click to enlarge

Source: Table prepared by author

Some of the prices and totals are not exact, but rather expressions of the hope that through dollar averaging purchases can be completed somewhere close to the prices and percentages offered in the table. There are several caveats to this example:

  • There are no guarantees these funds will continue to perform as they have historically.
  • These funds may not show the volatility needed to allow purchases at the prices shown in the table above.
  • The investor must recognize that these funds show market price volatility and one needs to steel oneself to stay the course.
  • One should scan updates from each fund's management to see if there are changes in fund management or changes in the marketplace that will affect future returns.
  • These CEFs use leverage that magnifies the ups and downs of these funds.

This series of articles show that it is possible to get a 7% return in today's market with a modicum of assurance that one's capital will not dwindle away. There is certainly more risk to one's capital than if one were to invest in CDs or government bonds, but these CEFs offer a wide-ranging assortment of investments that should help balance one's portfolio in the event of a market decline. These funds have stood the test of time and should hopefully work for the investor in the future.

Disclosure: I am/we are long HYB, RNP, UTF, HQH, HQL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.