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As a recent retiree who seeks passive income from my investments to help support my lifestyle while I no longer receive a steady paycheck, I have been implementing a strategy that I call my Income Compounder approach. If you have been following my articles, you are probably already familiar with my strategy. This includes buying shares of high-yield income investments that mostly pay monthly distributions, and then reinvesting most of those distributions into more shares of whatever is on sale at the time.
In Part 1 of this series, I covered CEFs (closed-end funds) and ETFs that mostly hold fixed income or alternative securities, such as covered call funds that derive income from writing options on the underlying stocks. The YieldMax ETFs are one example of those covered call funds, which I first wrote about back in May of this year. Recently, I covered FEPI, which is a newer ETF that also offers a high-yield income stream from selling covered calls on 15 top technology stocks.
In Part 2 of this series, I will review ten of my recommendations so far in 2024. These include some individual stocks like REITs, equity funds, and other taxable CEFs that may be of interest to income investors who hold these in a taxable account. For example, one benefit of holding these types of CEFs in a taxable account is due to the large amount of ROC (return of capital) that may be included in the distributions. The use of ROC can help to “juice the yield” of the distribution and can also be used in taxable accounts to lower the cost basis for shares that are eventually sold. This brief summary paper from Eaton Vance “demystifies” the concept of ROC.
Most closed-end funds pay regular monthly or quarterly distributions to their shareholders. Like open-end mutual funds, they are required after each year-end to provide an IRS Form 1099-DIV to every shareholder who received distributions during the year stating the distributions’ federal income tax character. Fund distributions may be characterized variously as: (1) dividends, (2) capital gain distributions or (3) non-dividend distributions, also known as return of capital distributions.
Different from taxable income and capital gains distributions, return of capital distributions are not subject to current tax. Instead, the tax cost basis of each shareholder receiving a return of capital distribution is reduced by the amount of the distribution, which increases the amount of capital gains (or decreases the capital loss) to be recognized when a shareholder sells his or her shares.
Some novice investors may erroneously assume that any ROC included in the distribution is “bad.” However, that is not necessarily the case. The paper from EV addresses this issue as well, but the drawback is that it can only be known after the fact whether the ROC is good or bad for the fund based on what happens to the NAV.
Look at the change in a fund’s NAV per share (net of distributions) over the course of a year: if NAV has increased, the fund earned more than it distributed. If NAV has gone down, the fund distributed more than it earned. Said differently, if a fund’s total return based on NAV has exceeded its distribution rate for the year, it earned its distribution. If not, the opposite.
In this review, like Part 1 of this series, I will show the YTD Total Return of each of the ten picks that I recommended earlier this year, along with the income generated through the first seven months of 2024. As an income investor, I am less concerned with total return than I am interested in the income received from my investment. However, I would like the total return to be positive so that I am not losing the capital that I am investing. I am fine with a short-term unrealized capital loss if it is not permanent (which can generally happen only if the shares are sold or called away).
For the purposes of this review, as I also did in Part 1, I will use Portfolio Visualizer. This will calculate how much income a $10,000 investment in each of the ten holdings would have generated through the first seven months of the year. That income calculation assumes all dividends are reinvested. In my portfolio, I typically reinvest all dividends that offer a discount to DRIP but take others as cash and then opportunistically reinvest that cash into whatever income holdings are on sale at the time.
Let’s take a more detailed look at the two REITs and eight CEFs (no ETFs this time) that I will be reviewing in this series in chronological order starting with my earliest recommendation:
EFC, THQ, SRV, RLTY, ASGI, CRF, IGA, IVR, IGR, and AOD.
EFC: Get High-Yield Income Paid Monthly from This Growing REIT
When I wrote about the REIT Ellington Financial (EFC) back in January, it was right after the Fed first indicated that rate cuts may be on the table this year, which sent many real estate stocks higher after a prolonged downturn. In addition, the acquisition of agency MSRs from Arlington Financial had just been completed. This was what I wrote in the summary of that article:
The stock trades at about 90% of book value, offers investors a monthly dividend of $0.15 which represents an annual yield of about 14%, and is well positioned going forward to increase revenues and earnings from the additional MSR opportunities afforded by the Arlington acquisition. I feel that EFC offers income investors a unique buying opportunity while the stock trades at a price below $13, and I recommend buying shares while the price remains down due to ongoing fears of high interest rates. Once rates do start to come down (presumably later this year), I believe that the price of EFC will rise quickly as the real estate market recovers in 2024 and EFC reports improved earnings over the coming quarters.
Now that interest rate cuts are back on the table, the stock has resumed its upward price trend. There may still be a buying opportunity given the outlook for EFC going forward, as explained by CEO Larry Penn on the Q2 2024 earnings call:
Moving forward, we have plenty of cash and borrowing capacity to drive portfolio and earnings growth with significant unencumbered assets plus other lightly leveraged assets. That dry powder is particularly valuable given the recent spread widening.
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In March, just about a month after my article was published, EFC announced a reduction in the monthly dividend to $0.13 where it has remained since. As a result, a $10,000 investment made in EFC in January would have generated $774 in income for the first seven months of the year.
THQ: Investing In a Healthy Future
After turning 65 this year and becoming eligible for Medicare, my focus on healthcare has shifted along with my investments. Not only have I decided to live a healthier lifestyle, but I have also decided to add some healthcare exposure to my income portfolio. As I wrote in my January article about the abrdn Healthcare Opportunities Fund (THQ), formerly one of the Tekla funds, the healthcare sector shows promising growth opportunities in 2024.
As 2024 unfolds and the healthcare sector is demonstrating a strong recovery with good prospects going forward it remains to be seen whether THQ can continue to pay out the same monthly distribution of $0.1125 that it has paid for nearly 10 years now.
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In fact, abrdn announced a 60% increase in the monthly distribution just after my article was published. As of this writing, THQ is trading discounted to NAV by about -7.3% and offers a yield of about 10% based on the $0.18 distribution that was raised from $0.1125 in February. A $10k investment made in THQ in January would have generated $676 in income for the first seven months of the year.
SRV: Not Your Grandfather’s MLP Fund
I have covered the midstream energy fund, NXG Cushing Midstream Energy Fund (SRV) multiple times, first rating the fund a Strong Buy back in April 2023 when SRV traded discounted by -12% to NAV. It paid a distribution yield of 16%. I then followed up with another article a month later after talking in depth with the SRV portfolio manager, John Musgrave. He discussed the fund’s strategy, details of the midstream energy space, and why he believed the fund is a strong contender to take advantage of the changing MLP/midstream investment landscape. That article also delved into the tax considerations for a fund that includes a large amount of ROC due to its investment in MLPs.
In addition, there are other tax considerations for holding MLPs in taxable accounts, including the way that distributions are handled and how they can reduce the tax burden for investors. Essentially, the ROC from distributions acts like depreciation, which reduces your cost basis. More information on the tax benefits to holding MLPs can be found here.
Most recently, I covered SRV in February of this year: “SRV: Midstream Energy Is Driving Strong, Uncorrelated Returns, Now Yielding 15%.” As of August 27th, the YTD total return has exceeded 35% due to the discount turning to a premium over the past six months or so.
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Currently, SRV yields about 12.5% and is trading near par or at a slight discount to NAV. The pricing chart on CEFconnect clearly shows how the discount has vanished this year, while NAV continues to increase despite the ongoing high-yield distribution.
CEFconnect
A $10k investment made in SRV in January would have generated $964 in income for the first seven months of the year.
Please note that I sold all my SRV shares at the end of June when the fund was trading at a premium so that I could buy shares of its sibling fund NXG to take advantage of the rights offering. I participated in the RO and now own a full position in NXG, which offers a higher yield and still trades discounted to NAV while holding many of the same positions that SRV holds.
RLTY: Real Estate Appears Set to Soar
Back in March, when it appeared that the real estate sector was beginning to recover from its 3 prior years of poor performance, I wrote about the Cohen & Steers Real Estate Opportunities and Income Fund (RLTY). I suggested that you could Invest in the Best Real Estate Stocks of 2024 by buying RLTY. Now, with expectations of a rate cut next month, real estate continues to outperform.
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Despite the rising NAV and the narrowing discount, RLTY still trades at -6% below NAV and currently yields about 8%. A $10k investment made in RLTY in January would have generated $563 in income for the first seven months of the year.
ASGI: Infrastructure Also Set to Soar in 2024
I have really become a big fan of fund manager abrdn lately. If you read Part 1 of my series that highlights several fixed income funds that I recommended in the first half of this year, you noticed that I reviewed ACP, an 18% yielding global credit fund. Later in this article, I will review another abrdn fund offering, AOD. This review is a look back at my suggestion to consider buying shares of abrdn Global Infrastructure Income Fund (ASGI), which I wrote about in March of this year: “Global Infrastructure Finds Its Sweet Spot In 2024.” This was what I concluded in that article:
At the current price of $17.56 as of March 14, the fund trades at a substantial discount, which is likely to close as the reorganization with MFD is completed. The monthly distribution is attractive at a roughly 10% yield assuming the $0.15 distribution continues to be paid, although the yield may drop slightly if the NAV increases as a result of the fund reorganization. I rate ASGI a Buy at the current price/discount and recommend that investors add some shares to their portfolio for a long-term total return from a well-managed fund that is poised to benefit from the growing investments in global infrastructure.
Since that article was published, ASGI has increased the distribution multiple times, and the discount to NAV has subsequently narrowed to about -5.5%. The YTD total return has just about matched the S&P 500 (SP500), which is quite impressive for an infrastructure fund.
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At the current price and given the recent $.20 monthly distribution, ASGI offers investors a forward yield of about 12% with potential for additional capital appreciation as the discount continues to close.
A $10k investment made in ASGI in January would have generated $700 in income for the first seven months of the year.
CRF: Building a Foundation for Income
In March of this year, I wrote an updated recommendation for the Cornerstone Total Return Fund (CRF). I have previously covered CRF multiple times including my December 2022 article that explained the “proper” way to invest in CRF and its sibling Cornerstone fund, CLM. One thing that the charts will not tell you when looking at past performance of the C’s (CRF and CLM) is the additional benefit you receive from reinvesting the monthly distribution at NAV, which is typically well below the market price. Because CRF tends to trade at a relatively high premium to NAV, that discount can be substantial. For example, CRF currently trades near its average 52-week premium of about 14% as can be seen on CEFconnect and offers investors a yield of about 16% at the current price.
CEFconnect
The underlying holdings in both CRF and CLM tend to mimic the holdings of the S&P 500, so when the overall market is bullish, the NAV of the fund trends upward along with the broader market.
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Likewise, the price of the fund dips when the broader market falls as it did back in October 2023, which was an excellent time to load up on shares of the fund. That is also the time of year when the fund determines the following years managed distribution, which is typically based on 21% of the NAV as of the end of October of the previous year.
For the income calculation, please be aware that the standard calculation assumes reinvesting dividends at market value. However, in real life, if CRF shareholders take advantage of the DRIP discount the income will likely be much higher because more shares can be purchased at a lower price by reinvesting at NAV.
A $10k investment made in CRF in January would have generated $1,076 in income for the first seven months of the year.
IGA: This Global Equity CEF Now Pays Monthly
In April of this year, five of the closed end funds managed by Voya announced substantial increases to the distributions, and in the case of several of them also changed from quarterly to monthly payouts (IGD already paid monthly). I reviewed the Voya Global Advantage and Premium Opportunity Fund (IGA) when I rated the fund a Strong Buy after that announcement. This was my summary from that article:
If you are an income-oriented investor seeking a high yield monthly income from a global equity fund that has a large cap value tilt, IGA is worthy of consideration. Offering some diversification from the more growth-oriented covered call equity funds such as those available from Eaton Vance, or other large cap growth funds such as QQQ, the IGA fund offers a managed distribution that now yields 12% annually after the recent 29% raise in the distribution.
At the current market price, IGA is trading discounted by about -13.5% to NAV, and that discount is likely to close as investors buy up shares to capture that high-yield income.
Since then, the discount has indeed begun to close, and the fund now trades at an -8% discount to NAV while offering a yield of about 10.8% based on the $0.085 monthly distribution.
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A $10k investment made in IGA in January would have generated $540 in income for the first seven months of the year.
IVR: Buy This 18% Yielding REIT While Still on Sale
In April, following the beginning of a real estate recovery (which I had written about in my earlier article on EFC), I noted that Invesco Mortgage Capital still offered investors a yield of about 18% (based on $0.40 per share paid quarterly). This was due to the price of the stock being well down from its previous price range, and which remained depressed due to the delay in interest rate reductions.
Depending on what happens over the next few months regarding inflation, the future of interest rate cuts, and other Fed actions including the reduction of Treasury sales, the REIT sector may see a continued recovery in the second half of 2024. If that scenario plays out, IVR stock will appear relatively inexpensive now while offering a distribution yield of 18.5%.
Although the price of the stock has retreated in the past few weeks, the income distribution has been maintained so far this year. At the current price, the yield is still around 18% and appears to be well covered, despite interest rates remaining higher into August. In fact, in the Q2 earnings report the company reported EAD of $0.86, more than double the $0.40 dividend.
“Earnings available for distribution for the period continued to be supported by attractive interest income on our target assets, favorable funding and low-cost, pay-fixed swaps. For the quarter, earnings available for distribution per common share was $0.86, unchanged from the first quarter.
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From the Q2 earnings call, CEO John Anzalone had this to say about the outlook for the second half of 2024:
Given our expectations for a steeper yield curve and an eventual decline interest rate volatility, our outlook for agency mortgages is positive. In particular, we believe investors in agency mortgages stand to benefit from attractive valuations, favorable funding and strong liquidity as market conditions improve.
A $10k investment made in IVR in January would have generated $923 in income for the first seven months of the year.
IGR: Get High-Yield Income as Global Real Estate Stabilizes
Following on the prevailing theme of a recovery in the real estate sector, I wrote a follow-up in mid-July to my November 2023 article on the CBRE Global Real Estate Income fund (IGR). In that recent review, I wrote:
IGR is a real estate CEF trading at a discount to NAV of -5.5% with a 13.3% annual yield.
At the time of that publication just over a month ago, the price was $5.57 and the monthly dividend of $0.06 resulted in an annual yield of about 13%. In the past six weeks, the price has popped, and the yield has dropped. As of the close of trading on 8/27/24 the price of the fund was $6.34 and the yield now based on the same six cents a month distribution is about 11.37%.
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The expectation of rate cuts has sent the stock soaring, as I had predicted in that article:
My expectation and my thesis in reviewing this fund is that the global real estate recovery has only just begun, and the bottom is finally in, whether inflation continues to recede or not. I believe that it is not too late to Buy shares of IGR if you are interested in steady, high-yield monthly income from a fund that has some potential for additional capital appreciation as well. Meanwhile, the share price is likely to continue to rise as the NAV increases and the discount remains wider than -5%. I suggest taking a closer look at IGR now if you have held off buying it previously. There is a lot to like in this fund in the current macro environment.
And indeed, the discount has closed completely, and the fund now trades at a premium to NAV of about 3.5%, which is the result of the dramatic rise in price as shown on CEFconnect.
CEFconnect
A $10k investment made in IGR in January would have generated $802 in income for the first seven months of the year.
AOD: Get 14% Yield After the 70% Distribution Increase
Another fund from abrdn caught my attention earlier this month when they announced a 70% increase in the monthly distribution, presumably to attempt to close the wide discount that the fund has been trading at. One of the most recent additions to my IC portfolio is the abrdn Total Dynamic Dividend fund (AOD). In my article on AOD from August 11, I explained the reasons behind my decision to add this equity CEF to my portfolio:
Although AOD has been around for many years, it has only recently captured my attention for several reasons: abrdn fund management (who acquired Alpine in 2018), insider buying by activist investor Saba, the pending reorganization with the FGB fund, and a substantial increase to the monthly distribution along with the change to a managed distribution policy.
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The fund’s holdings mimic the S&P 500 somewhat, and the YTD total return is close to matching the index now that the price has increased after the distribution announcement. Of course, it is far too soon to determine whether this will turn out to be a good call, but indications are that the discount is likely to close from the current -12% value, just slightly better than the 52-week average. The increased distribution results in a forward yield of about 13.6% at today’s closing price of $8.82.
CEFconnect
Further reasons to expect future strong performance include serious insider buying from activist investor Saba Capital and the pending reorganization with FGB.
A $10k investment made in IGR in January would have generated $510 in income for the first seven months of the year, but that is because the old distribution was only $0.0575 per month. The distribution was raised to $0.10 per month starting with the August payment.
Summary: 2024 Has Been a Good Year for Income Investors
This concludes my review for part 2 of my series on taxable income investments that I have recommended so far in 2024. There are other suggestions, of course, that I have not discussed here. These include multiple suggestions in other articles that I have written regarding my Income Compounder portfolio, including this mid-year review of my Schwab IRA holdings, and the earlier discussion of what were my top 10 holdings back in May.
I hope this information has been helpful, and I appreciate any comments or feedback on any of the ideas presented herein.
