Get Rich - Stay Rich - Investing for Monthly Income

Posts Tagged ‘monthly income dividend payers’

Getting High Yields from Closed-End Funds

This is the second in the investing for monthly income series: how to get high yields from closed-end funds.

What is a closed-end funds (CEF) and how is it different from other investments? A closed-end fund is legally know as a ‘closed-end company.” It is one of three investment types of investment companies. The other two are mutual funds and unit investment trusts. Unlike mutual funds, closed-end funds sale a fixed number of shares at one time that trade on the major stock exchanges such as NYSE, NASDAQ, etc.

The price of CEFs are set by the market and can be above or below their net asset value. Generally, CEFs do not redeem shares from investors as the shares are bought and sold at market value on the exchanges.

CEFs come in many varieties with different objectives, strategies and payment time frames.  These funds can easily be purchased through any discount brokerage in both taxable and tax-deferred accounts.  The CEFs we are interested in pay monthly dividends and provide a high yield. When these funds trade at a discount (share price is lower than net asset value), their dividend yield is higher. This creates an opportunity for potential capital gains in addition to monthly income.

Upon receipt of monthly dividends, you can reinvest some or all into more shares of CEFs or other dividend investments. Reinvestment of dividends creates a compounding effect that will grow your income each month. There are rumors that former President Bill Clinton receives $84,000 per month in dividend income. This is a large supplement to the $16,750 Clinton receives from his government pension per month. This is one method that helps the rich get richer. However, you can accomplish the same objective by investing for monthly income.

Where can you find a list of CEFs? I personally use CEF Connect to track a list of CEFs in a portfolio. This is a free service (requires registration) with a search engine that will separate monthly payers from the flock. At last count, there was more than 400 CEFs that pay monthly dividends. There is a comprehensive list in Get Rich – Stay Rich.

The best time to buy CEFs is when they pull back in share price. The one caveat is to ensure their earnings per share is more than their dividend payout (this is available at CEF Connect under the distribution tab). If not, then you should sell and evaluate another CEF. The other item to watch is that the CEF pays distributions from ordinary income and does not pay from return of funds. Any return of capital means the CEF is giving back capital in the form of dividends which means the company did not earn their pay. Sell immediately if you see a return of capital.

The more you research CEFs, the more you come to like the total return and consistency of monthly paychecks. Keep in mind that financial independence is replacing your current income with passive income. CEFs are one investment to help get you closer to living a life within your comforts.

Here are two preferred stock CEFs for consideration:

The AllianzGI Convertible and Income Fund 5.62% (NCV) cumulative preferred stock is now trading in the $24.61 area to give it a current yield of 5.71%. This issue is rated AAA by Fitch. The issue had an excellent asset coverage ratio of 353% when it last reported.

AllianzGI Convertible and Income Fund II 5.50% coupon preferred (NCZ) is trading in the $24.04 area to offer a current yield of 5.73%. With a rating of AAA from Fitch, it a very safe issue. This CEF issue has an asset coverage ratio of 368% at last report.

Most of the CEF preferreds from Gabelli are now trading with current yields in the 5.2% to 5.3% range, indicating that the AllianzGI issues are relatively underpriced and present a good opportunity to purchase the safety of a AAA-rated preferred stock issue.

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Blueprint for Creating a Monthly Income from Dividends

To replace your job income you must determine how to generate different streams of income. the easiest way to do this is through passive dividend income. You can start with one monthly dividend check and increase it to as many checks as you want to receive each month. I have known people who collect more than 100 monthly dividend checks! Here are some rules to guide your monthly income dividends.

The first rule is to focus on dividend payers rather than growth stocks, value stock or any other stock pushed by the guru of the month. History tells us that owning dividend paying stocks and reinvesting dividends beats all other investment options. Over the last 10 years, dividends may be the only return seen by many investors as the S&P 500 was relatively flat during this period. Dividends have contributed 42% of total return by the markets since 1920. As for reinvesting your dividends, you get more compounding return from monthly dividend payers than quarterly dividend stocks or semi-annual dividends like many bonds pay.

When you invest in monthly dividend stocks, you will be spoiled in a few months as you experience the growth of passive income. The second rule is that it is always tempting to take the cash but you should reinvest all or a portion of your dividends. This will grow your monthly income as you purchase more shares in dividend payers. For example, a $20,000 portfolio with a yield of only 7% will grow total dividends from $1,400 to nearly $2,800 with reinvested dividends and 6% dividend growth over five years. This is the power of compounding returns and the success of this strategy.

Rule 3: If you have a choice between a low yield of say 3% or a higher yield of 9% always take the higher yield if the securities are both fundamentally strong. After all, your goal is to create a monthly dividend portfolio of dividend stocks so a higher yield produces more income. One exception is to be cautious when investing in ultra-high yield stocks of say 20% or more. These stocks usually have a bad reason for the higher dividend yield so it is best to avoid these payers. You keys to finding good stocks is a get monthly dividend checkspayout ratio below 80%, strong cash positions, fundamentally strong and a good history of dividend payments.

The easiest place to locate monthly dividend payers is through closed-end funds (ETFs). Monthly ETF payers can be found in many categories such as taxable, non-taxable, domestic stocks, foreign stocks, specific stock sectors, bonds, REITs, and many more. In fact, Rule 4 says you should consider investing in different sectors to diversify your monthly income dividend streams.

You can create a monthly income strategy by putting together the 4 rules outlined in this article.  Over time, your monthly income from dividends will replace your monthly income earned through wages.  Then you are financially free to decide how to spend your day and time.  Real wealth in measured not in dollars but having the free time to pursue the life you want to live.

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