More CEF Insider subscribers have been asking me how to deal with volatility lately. Its easy to see why:
Another Downturn Appears
Then Disappears
So today Im going to give you an easy way to cushion your portfolio in this whipsawing market. Im actually going to show you three ways.
All three are closed-end funds (CEFs) with a special insurance policy that tones down market lurches. But youll still enjoy market recoveries, like the one weve seen in recent days.
The best part: well keep our income stream strong and growing, thanks to these three funds massive 6.7%+ dividend yields. That kind of income stream isnt only nice to have, itll be critical when we run into the next crisis, as Ill explain further on.
The Covered-Call Edge
Lets start with the traditional ways most people try to cut down volatility. Those would be holding cashwhich, of course, gets you zero returnor so-called safe assets like Treasury notes, which pay a measly 2.5% at best.
If we want to have any kind of livable income stream in retirement, we need to do better. Which brings me to the solution I talked about off the top. Its called a covered-call fund.
Let me explain.
Covered call refers to a strategy where a fund holds a basket of stocks, then sells call options (or the right to buy a security if it hits a certain price) to an outside buyer against one of its stock holdings. That generates income, as the buyer pays the seller (in this case our closed-end fund) a premium for the call option. This extra cash flow, in turn, acts as a kind of hedge if the funds stocks fall in value.
Thats how covered-call funds take the edge off a volatile market. Now lets talk incomeand dive into the three specific covered-call funds I have for you today.
3 Laid Back 6.7%+ Dividends You Can Buy Now
Since these funds receive cash for their call options, you can expect a bigger dividend stream from them. And thats exactly what you get.
Massive Income Up for Grabs
The chart above shows three passive index ETFs youre probably familiar with: the SPDR Dow Jones Industrial Average ETF (DIA), the SPDR S&P 500 ETF (SPY) and the Invesco QQQ Fund (QQQ). This trio attempt to match the performance of the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100 indexes, respectively.
As income plays, these three passive ETFs are all duds.
While DIAs 3% yield is relatively strong, as you can see above, its the best of a pretty meager bunch when you compare them to their covered-call CEF alternatives: the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX), the Nuveen S&P Dynamic Overwrite Fund (SPXX) and the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX).
Heck, QQQX actually yields 10 times more than its ETF cousin!
These three CEFs track the three indexes very closely, but with one big exception: they also sell covered calls against their holdings, which is why their yields are many times greater than those of their index counterparts.
Also, since they sell call options on their portfolios, the value of their portfolios doesnt fall as sharply during times of volatility. Thats why DIAXs net asset value (NAV) bottomed above that of DIA in the last month:
A Step Ahead of the Index Once
And DIAX wasnt the only one, since QQQXs NAV, while still down, as tech hasnt recovered as much as other sectors, still didnt hit the lowest point QQQs NAV did:
Twice
And for the broader index fund, the covered-call approach also helped SPXXs NAV escape the lowest point SPY did:
And Three Times!
So, as you can see, holding these covered-call funds helps limit your funds downside during brief periods of volatility while also providing you with the markets upside when stocks recover.
But the most important part is the income.
Your Dividend Hedge Against the Next Crash
For any retiree, or anyone who uses their portfolio as a source of income, these funds are a no-brainer, and a way to safeguard against accelerated losses during a downturn.
Think of it this way: if you held SPY over SPXX and you needed a 6.7% income stream, you would need to sell part of your portfolio during the downturn to guarantee that income stream keeps coming in. But SPXX avoids this forced-loss selling: thanks to its higher yield, youre getting a huge slice of your return in cash, cutting the need to sell anything when you dont want to.
During times of protracted volatility, like we saw in late 2018, being able to avoid selling is the difference between double-digit losses and long-term gains driven by patience and perseverance. And thats exactly what these CEFs make possible.
This Hidden 7% Dividend Is Recession-Proofand Tax-Free, Too
Covered-call funds arent the only CEFs that can build some Zen into your portfolio during a market wipeout.
Theres another type of high-yield CEF that can do the exact same thing: municipal-bond funds.
Muni-bonds are among the steadiest CEFs youll find because theyre backstopped by the most reliable consumer there is: the government!
States, counties, towns and cities issue municipal bonds (or munis) to fund badly needed infrastructure, such as roads, bridges, airports and railroads.
That makes them a solid source of income on their ownand you can boost your dividend stream even more if you buy your munis through a CEF, like the one I recommended just a few days ago, in the latest issue of CEF Insider.
Check out the steady upward climb my brand-new pick has put on over the past year (in blue below), compared to the motion sickness your typical S&P 500 investor suffered:
Imagine Holding This Steady Eddie Fund
And it still has plenty of room to run!
Headline Yield Deceives
Heres something else I love about muni-bond CEFs: their dividends are tax-free for most Americans. So even though my picks current yield is only 4.8%, its real yield could be north of 7% to you, depending on your tax bracket.
To get all the details on this new pick, all you have to do is click here to take a no-obligation trial to CEF Insider.
When you do, youll get members-only access to my latest issue (which dropped just days ago). It gives you everything you need to know about this stout income play before you buy.
Thats not all.
Ill start by showing you 5 of my other top picks from across the CEF space. Right now, these 5 buys pay a sky-high 8% average dividend! These 5 funds are all great buys if youre looking to keep your portfolios volatility under control while multiplying your income stream 2X, 3X or even more.