151. How to quit working with $300,000 - 6 dividend funds yielding 12% annual return
Today I’m going to show you how to get a livable income stream from a $300,000 nest egg—while growing your savings at the same time.
Sounds impossible, right?
What’s more, we’re going to pull it off using just six funds. When we’re done, we’ll end up with a simple, diversified portfolio that throws off a nice, steady 7.9% dividend yield!
And if you’re worried that this outsized yield could come at the cost of a weak total return, don’t be, because these funds have delivered 12% per year over the past decade.
Before I get into these six funds, let me show you what numbers like these can mean for you: if we start with an upfront investment of $305,000 in this portfolio and leave it alone for 10 years, we can expect our capital to explode to nearly $1 million in a decade.
History tells the tale: if you had invested $305,000 in these funds 10 years ago, you would have done just that.
The Power of a 12% Total Return:
Now I’m not saying history is going to repeat exactly here, but remember that we’re talking total returns in the chart above, and much of that gain came in the form of dividends.
We can expect those hefty payouts to continue. As I said off the top, this portfolio has a 7.9% yield, meaning our $305,000 initial investment is going to give us $24,000 in annual income—that’s $2,000 per month!
Granted, many Americans make more than that in a year, so you may not be able to completely replace your income with this cash stream. But some folks could. In some parts of the country, average incomes do go down to $24,000, and with rents for one-bedroom apartments falling below $600 in some cities (like Wichita, Cleveland, Tucson, El Paso and Albuquerque), it is possible to live entirely on this income stream.
But even if you can’t live on $2,000 a month, this portfolio could hand you a nice, reliable supplementary income stream, leaving you much less reliant on the 9-to-5 grind.
So how does the portfolio work?
Connecting the Pieces
The six funds I’m talking about come from four management firms with impressive track records: PIMCO, John Hancock, Columbia Management and Flaherty & Crumrine.
Together, they hand you exposure to over 300 firms through stocks and bonds. On top of that, the Columbia Seligman Premium Technology Growth Fund uses an insurance strategy that protects you from a bear market by selling call options on the its equity portfolio. (My colleague Brett Owens explained how this works—and why it cuts your risk—in a February 22 article you can read here.)
And of course, by throwing $305,000 into this group of six funds, we can earn a monthly income a smidgen over $2,000 on this portfolio:
Surely with such high yields, you’re going to sacrifice capital gains, right? In many cases, this is a tradeoff investors need to make, but these funds have performed tremendously, with annualized gains exceeding 9%—and the best ones rising over 13.5% per year:
Income and Growth in 6 Easy Buys
Those gains are what allowed our $305,000 to balloon to $959,000 if we chose to keep these funds and save the cash they yielded in dividends.
With numbers like these, you might be asking yourself why hardly anyone is talking about these funds.
The answer: these six funds are known as closed-end funds, which are an obscure corner of the market.
Why are these funds so obscure? Because their massively popular cousins, exchange-traded funds, have totally stolen the spotlight, even though the best ETFs yield less than 3% (and many yield less than 2%). That’s not going to cut it if you’re yearning for an income stream that puts you on the road to financial freedom.
Then there’s the other cousin of CEFs, mutual funds, which have kept their stranglehold on the American financial industry thanks to regulation. Since 401ks can’t invest in anything other than mutual funds, many Americans have little choice but to invest in these funds when it comes to retirement planning.
But savvier investors who use IRAs and brokerage accounts can choose the six CEFs above, and others like them, and get a stronger cash stream while avoiding the excessive fees and lackluster returns mutual funds have become known for.
And there are plenty of other CEFs to pick from. There are about 500 on the market now, and dozens of them are beating their benchmarks. That’s helped CEFs see tremendous gains in 2017. While the S&P 500 SPDR ETF (SPY) is up 8.4% so far this year, the CEF Insider Equity Sub-Index is up 14.6%—that’s almost double the benchmark index’s performance!