Green's Portfolio: CEF Update, Powering Income For 2022

Green’s Portfolio: CEF Update, Powering Income For 2022

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Closed-end funds continue to be the income engine for my actively-managed Roth IRA retirement portfolio. This is an update of my CEF activity since September.

I opened positions in 16 CEFs since September, increasing CEF investment by 67.8% and the number of shares by 53.9%.

I currently hold 46 CEFs across a range of fund strategies, representing 30.9% of total portfolio investment (39.3% excluding cash position).

In 2021, CEFs contributed 52.9% of total portfolio income and will generate >$17.5k for 2022.

Oleg Elkov/iStock via Getty Images Through the many years of managing my own investments, I’ve owned and traded stocks, mutual funds, options and others. Over time, for my skills and time, and for consistency and performance, I’ve ruled out investing in mutual funds and options. For the past 5 years in retirement, I have tweaked a strategy that involves generating income from CEFs, REITs, and some high-dividend stocks, combined with swing and position trading of stocks. That stock trading strategy, as I have demonstrated through articles about my current portfolio (February to September 2021), focuses primarily on trading under-performing S&P 500 companies in under-performing sectors. Many trades are based on technical weakness, especially gaps below the daily 200 moving average in stock prices associated with earnings events. From February through September I closed 81 consecutive profitable stock trades for a median gain, including dividends, of +36.4% or +30.8% (cost-weighted) for 6.0 months (median) in the trade.

I still actively employ this two-part portfolio strategy, as I never want to put all of my eggs in one basket. Diversification and limiting my allocation to individual holdings are the ways that I have chosen to manage risk.

As I have written before, for me, the most important question to answer for my investments is “how am I going to get paid and when?” CEFs in particular provide an answer that I really like. CEFS Are the Cornerstone of My Portfolio

I like CEFs for a number of reasons: CEFs are well-regulated (SEC) and professionally, actively managed.

CEFs typically have relatively small capitalizations, such that institutional investors don’t play in this space and distort/influence price.

CEFs are generally high yield, often >6%, and while management fees can be high, distribution yields are net of fees.

CEFs often effectively use leverage to “juice” returns, taking advantage of cheap borrowing.

Many CEFs pay monthly dividends (distributions), which compound faster if re-invested [DRIP].

Many CEFs have stable distributions (some for decades) regardless of the share price fluctuations of the underlying assets, which is a ‘SWAN’ factor, especially for retirees.

With fixed numbers of shares, CEFs can trade at discounts to their Net Asset Value [NAV], the actual value of the underlying assets.

CEF funds provide plenty of diversity, with equity, bond, and hybrid funds; US, global, and international allocations; sector concentrations; and AMT-free funds (“munis”).

Most important for me, CEFS are my top asset class for generating higher-yield income in retirement. They work especially well in an era of commission-free trading and in my Roth IRA wherein any income and gains are not taxed. Pay Me Now

I don’t currently need to withdraw funds from my retirement investments, but I never know when that day may come, or when my account will see its final transfer (tax guru Ed Slott’s “last limousine ride”). So I like the idea of bringing profits home along the way instead of waiting for some future payouts. The risk of waiting for future payouts is that the market may be in a correction or recession, and I could lose a significant amount of my “unrealized” gains. Investors only have to remember the spring 2020 COVID selloff, for which the S&P 500 dropped 35%, or the 2008-9 Great Recession when the market sold off 57%. Then there was the “lost decade” of the early 2000s (actually 2000 to 2013), when the S&P was essentially flat for the entire period. High-flying stocks (e.g., tech and the like) that pay no dividends and for which the lofty gains are always unrealized (“paper”) until the stocks are sold, incur the risk of a price correction. And now we have markets propped up by huge infusions of cash while amassing debt.

With CEFs, I can potentially get a greater percentage of my ending investment returns from dividends (distributions) collected along the way and through re-investment. For example, the Calamos Strategic Total Return Fund ( CSQ ) has returned an average annual return of 5.67% since 2005 (inception was in spring 2004), but with dividend […]

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