How Equity CEFs Pay Out 6.6%+ Dividends – Even in a Downturn

Shutterstock photo

By Michael Foster

Today weaEURtmre going to dive into a question subscribers to our CEF Insider service often ask: what happens to a closed-end fund aEURtms dividend when stocks take a tumble?

The answer is coming up shortly (and if youaEURtmre at all worried about this levitating market suddenly snapping back, youaEURtmre going to like what I have to show you).

Then IaEURtmm going to reveal one 6.6%-paying fund whose management is dialed in to market swings and know how to protect their investorsaEURtm income when things get rough.

How do I know? Because they did just that in the 2008-09 crisis.

More on that shortly. First, letaEURtms step back and talk about what a 6.6%+ income stream can do for you when the market throws a fit.

CEF Dividends: Critical Portfolio Protection

If youaEURtmre leaning on your portfolio for income, the most obvious advantage of a 6.6% dividend is its size: with the benchmark SPDR S&P 500 ETF ( SPY ) yielding a measly 1.8%, youaEURtmre already getting almost four times more income than the typical investor who buys today would bring in.

ThereaEURtms a lot more to like about an income stream like that, though. And this is where a potential downturn enters the picture.

Imagine, for example, that we have another 2008-2009aEUR"style crash and stocks tank 50%. If your portfolio yields the S&P 500 average and you need 6% returns to pay the bills and put food on the table, youaEURtmll have to sell some of your holdings, because your dividends, on their own, arenaEURtmt enough to make ends meet.

But if you have 6.6% dividends, you donaEURtmt need to sell a thingaEUR"you can sit back, collect your payouts and wait out the market volatility.

You donaEURtmt even have to go back to the financial crisis to see this aEURoedividend safety netaEUR in actionaEUR"a lot of income investors used it just last year. When the market fell by over 12% in the span of months, SPY holders in need of cash from their portfolios would have been forced to sell their holdings for 12% less than they would have a few months earlier.

Not so for those relying on the fund I want to spotlight for you today: the 6.6%-yielding Nuveen Dow 30 Dynamic Overwrite Fund ( DIAX ) . If you owned this CEF last year, you didnaEURtmt have to sell a thing until stocks recovered!

6.6% Dividend Gives Investors Much-Needed Cover

By the way, this doesnaEURtmt only hold for DIAX. Many other CEFs, like the Eaton Vance Tax Advantaged Dividend Income Fund ( EVT ) and Adams Diversified Equity Fund ( ADX ) continued to pay out their 6%+ dividend yields throughout last yearaEURtms volatility. And DIAX and this pair all caught up with the index in a few short months:

High Dividends Keep CEF Investors in the Money

But how is this possible?

Active Management Preserves Your Income

CEFs are similar to more familiar exchange-traded funds in that they are pools of different investorsaEURtm cash that are put in a portfolio of assets. But there are two important differences.

One is that ETFs are open-ended, meaning they can take more capital and become bigger and bigger. ThataEURtms why SPY has $280.6 billion in assets, while the similar Nuveen S&P 500 Dynamic Overwrite Fund ( SPXX ) has just $265.2 million. Big funds are easy to manage if they take a passive strategy, like just buying all of the S&P 500, which is why most ETFs are passive or follow very specific rules.

CEFs are different. Due to their smaller size, fund managers can manage portfolios to maximize income. Say, for instance, a Great RecessionaEUR"style downturn happens again. A good CEF manager will maintain a mixture of non-correlated stocks in a diversified portfolio of hundreds of assets. Then they can hold on to the ones that are temporarily at a loss during a downturn.

This can even be done with a relatively simple mandate like that of DIAX: the fund aims to replicate the price movements of the Dow Jones Industrial AverageaEUR"names like Home Depot (HD), Apple (AAPL) and Walt Disney Co. (DIS). In addition, DIAX uses covered-call options to boost the fundaEURtms income stream.

As a result, DIAXaEURtms income stream quickly recovered from a short-term dip during the Great Recession:

A Carefully Managed Dividend

Note that there is a delay between the market downturn and the fundaEURtms dividend reduction. While stocks crashed in 2008-2009, DIAXaEURtms dividend stayed at a constant at 15 cents per share, only dropping to 10.3 cents per share in 2010, after the fundaEURtms value had almost fully recovered.

Then, after a brief pause, dividend growth resumed.

These were deliberate decisions to ensure that investors had the income they needed during a dire market, and theyaEURtmre the kind of decisions good CEF managers make to protect their investors from needing to sell when stocks are down.

For DIAX holders, the result had been a pretty steady income stream of around 7%. If youaEURtmd bought DIAX at the start of 2008, 2009 and 2019, your yield on cost would have stayed at a similar level:

Source: CEF Insider

This means that the income stream has remained reliable for shareholders no matter when they buy. If you get DIAX, youaEURtmll get a pretty solid income stream yielding around 7% whenever you buy.

Buy This Growing 10.7% Dividend NowaEUR"While ItaEURtms Still a Bargain

IaEURtmve found a way for you to bulk up your portfolioaEURtms safetyA and A bag an even bigger payout than DIAXaEURtms 6.6% dividend. IaEURtmm talking about a mammoth 10.7% income stream that would make your typical S&P 500 sick with envy.

ThataEURtms the dividend paid out by my top stock-focused CEF pick now. IaEURtmve issued a buy alert on this top-secret equity CEF for 2 reasons:

  • It boasts an amazing 10.7% dividend yield.
  • Its cash payout is growing, up an incredible 143% in the last decade!

How does this fund do it?

ItaEURtms run by an investment all-star team cherry-picked from 5 of the sharpest management firms on Wall Street.

Together, this crew invests in a aEURoeno-gimmicksaEUR portfolio of value and growth stocks, all of which have deep moats protecting their businesses: names likeA Visa (V), Microsoft (MSFT), Alphabet (GOOGL) A andA Abbott Laboratories (ABT).

So how has this all-star team performed?

TheyaEURtmve dominatedaEUR"and critically, most of my pickaEURtms monstrous total return since inception came in cash, thanks to its big dividend payout:

Crushing the Market in Cash

Finally, this fund trades atA an absurd 5% discount A to net asset value (NAV, or the market value of the stocks in my pickaEURtms portfolio). ItaEURtms only a matter of time before that discount evaporates and shifts to aA big premium. When it does, it will propel my pickaEURtms market price higher, handing you some very nice price upside to go along with your 10.7% dividend payouts.

IaEURtmll give you everything you need to knowaEUR"name, ticker, buy-under price and a complete look under the hood of this powerful 10.7%-paying pickaEUR"when you click right here .

ThataEURtms not all! IaEURtmll also give you my 3 other top cash-spinning CEF picksA (combined yield: 8.7%; price upside: 20%),A too. DonaEURtmt miss out.A Click here now !

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
Referenced Symbols: SPY , DIAX , EVT , ADX , SPXX

More from BNK Invest


BNK Invest

BNK Invest

Market News, Investing

Research Brokers before you trade

Want to trade FX?