High Yield For Granny (Part 2): Savvy 'Widows & Orphans' Portfolio Re-Visited

by: Steven Bavaria

So far Granny is smiling, as her portfolio collects cash at an 8% rate, while, after 6 months, racking up a total return of 6.4% (annual rate 12.8%).

That puts her ahead of our Savvy Senior "Income Factory" in total return, although at an 11.6% yield, the Factory is still compounding income at a faster rate.

Between the Income Factory, the Widow & Orphan portfolio, and being able to mix and match the two, there should be some comfortable combination of risk and reward for everyone.

Our "High Yield for Granny" article (link here) last March introduced the idea that you could achieve an "Income Factory" strategy at various levels of yield, risk and return. In particular, we introduced a portfolio of solid closed-end funds whose average distribution was about 8% as an alternative to our core "Savvy Senior" Income Factory that currently pays a distribution of 11.6%.

We showed that, through the power of re-investment and compounding, an 8% stream of income doubles and re-doubles about every 9 years, so a $100,000 portfolio yielding 8%, re-invested annually, would generate the following approximate yearly income stream:

  • $8,000 in Year 1,
  • $15,992 by Year 10,
  • $34,525 by Year 20,
  • $74,538 by Year 30, and
  • $160,922 by Year 40.

That is clearly "growth" by anyone's definition and would be attractive to investors of whatever age who wanted to grow a steady long-term income stream. We also described, by contrast, how an 11% income stream, re-invested and compounded, would double and re-double itself about every 6.5 years. So the same $100,000, invested to yield 11%, would generate the following approximate income stream:

  • $11,000 in Year 1,
  • $28,138 by Year 10,
  • $79,896 by Year 20,
  • $226,860 by Year 30, and
  • $644,152 by Year 40.

The ability to generate over $600,000 by year 40 in the more aggressive 11% portfolio, versus $160,000 by year 40 in our more conservative 8% portfolio, reflects the obvious fact that with doubling every 6.5 years instead of every 9 years, the 11% portfolio gets to double itself two additional times during the 40 years than the 8% portfolio. If you add two more "doublings" to the $160,000 income stream in year 40 of the 8% portfolio, you account for the difference. (No wonder Albert Einstein is reported - probably erroneously - as having said that compound interest was the eighth wonder of the world!)

The March Widows & Orphans article was one of the most widely read pieces I have written on Seeking Alpha so far. While that may be due to the clever title (my wife says I should somehow work "High Yield for Granny" into the title for the "Income Factory" book I keep threatening to write), I think it also captures the broad interest so many of us have in the delicate and hard-to-define balance between risk and reward, yield and safety that we face in our investment choices.

It is obviously not just an "either-or" choice between two extremes, like 8% and 11% (which isn't all that extreme to begin with), but more of a continuum of choices. In fact, if we wanted to, we could create a "conservative Widows & Orphans" portfolio that targeted a yield of about 6-7% (still not bad) and whose income stream would double and re-double every 10.5 to 11 years.

It was to try to reflect this flexibility of choice in the original article that I presented some options for "souping up" the basic Widows & Orphans portfolio by adding incrementally higher yielding and presumably higher risk investments to the portfolio to bring its distribution yield up and accelerate its doubling/redoubling rate. I also included an Excel spreadsheet that allowed readers to play around and plug in whatever distribution yields and starting values they wanted to and project it out 40 years. (See the link to that Excel file here.)

Update to the Original "Granny" Article

Unlike our Savvy Senior Income Factory, which is a real portfolio that I've been managing and tracking for over 25 years (the most recent version of which is here, and is updated every quarter), the Widows & Orphans portfolio is only a theoretical portfolio created last March, so I don't have actual results to report at this point. I hope to remedy that soon, as I am just about to add a new "client" to the informal "family and friend" asset management practice that I have, and I expect to take a portion of the assets and commit them to the W&O portfolio. This should allow me to report on actual results in the future, rather than just theoretical results.

But for now, let's take a look at the W&O portfolio - theoretical though it is - and see how it has done since March, based on published fund results.

Savvy Widows & Orphans Portfolio - September 18, 2018
March September
Asset Class Fund Name Fund Symbol Distribution Rate Discount or Premium Distribution Rate Discount or Premium 6 Mo. Total Return Distribution Rate Change Discount/ Premium Change
Senior Loans Ares Dynamic Credit Allocation ARDC 8.05% -9.59% 8.12% -10.38% 1.49% 0.07% -0.79%
Blackstone/GSO LS Credit BGX 7.69% -6.30% 7.48% -4.17% 5.96% -0.21% 2.13%
Apollo Tactical Income AIF 7.65% -10.35% 7.94% -9.40% 3.65% 0.29% 0.95%
Apollo Senior Floating Rate AFT 6.97% -7.35% 7.14% -8.50% 0.19% 0.17% -1.15%
THL Credit Sr Loan TSLF 6.79% -8.38% 6.89% -9.82% 1.81% 0.10% -1.44%
High Yield KKR Income Opportunities


9.45% -9.73% 9.02% -5.24% 9.82% -0.43% 4.49%
Barings Global Short Duration BGH 9.50% -8.56% 9.11% -5.79% 8.84% -0.39% 2.77%
PIMCO Dynamic Credit Income PCI 8.55% -2.83% 8.12% 2.62% 9.99% -0.43% 5.45%
Credit Suisse Asset Management CIK 8.27% -7.71% 8.57% -9.22% 0.80% 0.30% -1.51%
BlackRock Corporate High Yield HYT 7.95% -11.77% 8.15% -10.70% 4.30% 0.20% 1.07%
New America High Income HYB 7.53% -12.39% 7.75% -12.26% 0.78% 0.22% 0.13%
Barings Corporate Investors MCI 8.08% -1.91% 7.91% 0.73% 6.22% -0.17% 2.64%
Multi-Asset Brookfield Real Assets RA 11.01% -10.10% 10.18% -3.58% 11.79% -0.83% 6.52%
Clough Global Opportunities Fund GLO 10.73% -10.72% 10.92% -7.91% 3.41% 0.19% 2.81%
Cohen & Steers CEF Opportunity FOF 8.19% -6.60% 7.91% -3.44% 8.00% -0.28% 3.16%
Calamos Strategic Total Return CSQ 8.08% -7.19% 7.45% -0.52% 13.25% -0.63% 6.67%
Black Rock Mulit-Sector Income BIT 8.10% -9.14% 8.07% -7.66% 4.22% -0.03% 1.48%
Real Estate Nuveen Real Estate Income JRS 9.42% -3.65% 8.12% -7.85% 7.79% -1.30% -4.20%
Cohen & Steers REIT & Preferred RNP 7.83% -11.04% 7.40% -9.04% 10.76% -0.43% 2.00%
Utility/ Infrastructure Cohen & Steers Infrastructure UTF 8.64% -10.44% 7.83% -5.40% 9.47% -0.81% 5.04%
Reaves Utility Income UTG 6.73% -8.46% 6.48% -4.89% 14.08% -0.25% 3.57%
Preferreds JH Preferred Income Fund III HPS 8.38% -5.20% 7.74% 1.07% 12.29% -0.64% 6.27%
Convertibles Advent Claymore Convertible AVK 8.95% -10.28% 8.98% -10.71% 4.36% 0.03% -0.43%
Equity Sprott Focus Trust FUND 6.42% -8.43% 7.00% -9.98% -5.78% 0.58% -1.55%
EV Tax-Managed Diversified Equity ETY 8.47% -3.94% 7.82% 0.70% 12.85% -0.65% 4.64%
Average 8.30% -8.08% 8.08% -6.05% 6.41% -0.21% 2.03%

The portfolio consists of 25 closed-end funds, with the assumption that it is evenly split among them. In March when we started, the average distribution yield (which would be the actual distribution yield on the portfolio if you bought equal amounts of each fund) was 8.3% and the average market price to NAV discount was -8.08%.

Now about six months later, the average distribution yield has fallen 22 basis points, to 8.08%, and the average price discount has decreased 2.03% to -6.05%. That would suggest that, on average, market prices have risen, thus decreasing the yield and the price discount. If we look at the 6-month total return figures for each fund (per CEFConnect), we see that the average total return for the funds in the portfolio was 6.4% (12.8% annualized).

With an average cash yield of 8.3% per annum (4.15% for 6 months), the difference between the total return for 6 months (6.4%) and the amount received in cash (4.15%) of 2.25% represents the capital appreciation (i.e., paper profit) over the six months.

While capital appreciation is nice, it obviously is not our primary goal if our strategy is to re-invest and compound our income stream. On the other hand, in a high yield Income Factory strategy, having your total return exceed your cash distribution yield is the most tangible evidence that your distributions, even if they include some capital gains and other amounts that are technically "return of capital," are not ROC of the destructive variety.

To summarize, with an annualized total return of 12.8% and an annual cash distribution yield of 8.3%, I believe our Widows and Orphans portfolio is doing - so far - what we hoped it would do. Obviously some funds did better than others in terms of market appreciation, so there is room for tweaking for those so inclined. But I am not suggesting that such tweaking is necessary, since the closed-end fund market is highly inefficient and fund prices move around a lot for reasons that often have nothing to do with the underlying fundamentals of the fund or its components. So I am not inclined to start throwing funds on our original list overboard yet, just based on 6 months' results. One advantage of being so widely diversified allows us to be that patient.

Anyone who is looking to add additional funds, or prune their portfolio by lightening up on some of the funds that have moved closer to or into premium territory from discounts, or have seen their distributions drop, may wish to consider these funds that I would consider Widows & Orphans "approved list" candidates:

  • Western Asset High Income Fund II (HIX): 8.58% yield, -12.58% discount, good long-term performance record, 9.2% average 10-year Total Return.
  • Nuveen Floating Rate Income Opportunity Fund (JRO): 7.18% yield, -10.96% discount, 8.79% average 10-year TR.
  • First Trust Energy Income & Growth (FEN): 10.41% yield, -5.2% discount, 7.68% average 10-year TR.
  • Nuveen Tax Advantaged Dividend Growth Fund (JTD): 7.71% yield, -2.41% discount, 12.8% average 10-year TR.

As I suggested in my original "High Yield for Granny" article, investors can "mix and match" all they want from the W&O portfolio, our Savvy Senior Income Factory portfolio and other funds like those mentioned above and the many great suggestions from other SA contributors (my "research team" I call them, thank you all very much!!) like Stanford Chemist, Left Banker, Arbitrage Trader and others.

And, of course, you don't have to buy all 25 funds, if you are working with a smaller portfolio or just don't want to have so many funds. Picking one or two funds from each of the larger categories, along with a fund or two from the smaller categories would give you an easily managed portfolio of 7 or 8 funds that might work nicely for many investors. In the original Granny/W&O article, I suggested a "starter set" of funds comprised of ARDC, PCI, MCI, FOF, UTF, UTG and RNP. They are still all solid funds and worth holding, but some are no longer as attractively priced as six months ago, so anyone starting out and still seeking a shorter list might consider adding or substituting the newer suggestions from above (HIX, JRO, FEN and JTD) to the original starter set.

One final note. I will be writing my Income Factory quarterly review in a couple weeks, but as of today, the current cash yield is an annual rate of 11.6% (versus the W&O's 8.3%), and the total return so far is 6.5%, which projects out to an annualized rate of about 9% (versus 12.8% for the W&O). So while the Income Factory is grinding out more cash, as it is intended to, it has given some of it back in paper losses.

In other words, so far - after just six months - the Widows and Orphans are ahead of the Savvy Seniors, at least in total return. But the Savvy Seniors are collecting cash and compounding at a higher rate. We'll see how each makes out over time.

Meanwhile, as always, I look forward to your comments and suggestions.

Disclosure: I am/we are long KIO, BGH, MCI, RA, GLO, FOF, CSQ, BIT, JRS, UTG, UTF, ETY, FEN. 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.