Seeking Alpha

How To Retire On $500,000: 3 Years Later

Includes: MAIN, NIE, PCI, PDI
by: Michael Foster
Michael Foster
Closed-end funds, dividend investing, fund holdings

3 years ago, I wrote a post explaining how a young professional could save and retire in 5 years.

The recommended portfolio in that piece outperformed the S&P 500 significantly and now yields over 11.4%, thanks to special dividends and compounded returns.

This portfolio's outperformance demonstrates that a high yield approach can get a person financially independent much faster than expectations.

At the same time, large premiums indicate the need for high yield investors to rotate between assets as they are under- or overpriced. CEFs are particularly powerful in this regard.

Three years ago, I wrote a piece describing how a young, single professional could retire with just $330,000 after a 5-year savings period. The piece was controversial; of the 600 comments it earned, many were critical, skeptical, or derisive. High yield investing appears to inspire passions, in part because it defies the typical investment narrative that most people accept: one must work several decades, invest in a diversified portfolio of low-yielding stocks, and wait for dividend growth and capital gains, while limiting oneself to a withdrawal rate of no more than 4% - and even then, there is a large chance of failure.

This narrative has not been my lived experience over the last decade. Thanks to the closed-end fund structure and the diversified asset classes available to investors beyond stocks, financial independence can be obtained much earlier and with significantly less capital. This is the central theme of CEF Insider: one can have a diversified portfolio of stocks, bonds, and real estate and retire on a six-figure nest egg.

As an example of this strategy, my 2016 article focused on a portfolio of just four very high-quality picks: one BDC, Main Street Capital Corporation (MAIN), and three CEFs: the AllianzGI Equity & Convertible Income Fund (NIE), the Pimco Dynamic Credit and Mortgage Income Fund (PCI), and the Pimco Dynamic Income Fund (PDI).

While some readers criticized this portfolio at the time, it has been a clear outperformer by a significant margin.

The portfolio returned 54.2% since my recommendation (if assets were evenly distributed across picks), while the S&P 500 returned just 41.7% over the same time period:

An investor who stuck with an index fund instead of this income approach has missed out on $62,550 in inferior returns, or $20,850 per year, on a $500,000 portfolio:

Initial Investment



$ 125,000

$ 190,250


$ 125,000

$ 174,500


$ 125,000

$ 208,550


$ 125,000

$ 197,750


$ 500,000

$ 771,050


$ 500,000

$ 708,500

Despite some concerns that the income stream would be unsustainable or decline, payouts have increased slightly for the portfolio over the period:

With a 7.4% yield on average across these four investments, the yield on cost for my hypothetical investor in 2016 would be 11.4%, including only regular dividends.

If we add special dividends (which are substantial, as you can see from the spikes in the chart above), the yield on cost is likely to be even greater. The portfolio's significant dividend payouts have also resulted in a major passive income stream that far exceeds what the S&P 500 offered:






Cumulative Dividends

$ 32,077.92

$ 31,512.15

$ 44,405.86

$ 44,675.61

$ 37,350.56

Cumulative Yield






Annualized Yield






Annualized Income

$ 9,875

$ 9,750

$ 13,375

$ 13,375

$ 12,000

Monthly Annualized

$ 823

$ 813

$ 1,115

$ 1,115

$ 1,000

In addition to monthly income of $3,866 from a $500,000 portfolio, special dividends have brought the portfolio’s annualized yield to 9.3% versus 2.4% for the S&P 500.

This portfolio provides significantly higher and more reliable income than the S&P 500, while also providing larger total returns. There is absolutely no reason to be chained to a career for a lifetime while high yield investments are available, and there is no reason to think that financial freedom cannot be gained very quickly for anyone who can leverage a good education into a solid earning career.

The Future of the Portfolio

In 2016, when I showed investors the strong historical past performance of these picks, many believed that the future was uncertain. At least so far, the future has been fine. But will it remain so?

One of the worrisome issues with some of these picks is that their premiums to NAV have exploded. MAIN currently trades at a 74% premium to NAV - one of the highest premiums I’ve ever seen (only PGP has beaten that watermark in recent CEF history), although it is a well-deserved one, thanks to the company’s excellent management. Nonetheless, I believe that premium to be unsustainable and susceptible to higher volatility. Similarly, PCI’s pricing has gone from around par to a solid and rising premium, while PDI’s premium has also risen. Even NIE’s historical range of 8-10% discounts has been recently broken (although this range has been challenged several times in the past 3 years):

This does not mean it’s time to take profits from these picks. It is, however, a reminder that one should rotate holdings between a number of high yield picks as fund flows cause premiums to rise and discounts to fall. In CEFs, these fund flows are particularly irrational and volatile (BDCs exhibit a closer relationship between pricing and NAV performance), providing opportunities to go in and out of funds when they are priced right.

This is something the high yield investor should consider in order to maintain market outperformance and a high, growing income stream.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.