Attention retirees: Here are two CEFs yielding as high as 8.6% for stable income and inflation protection

CEFs are overlooked. But they can make perfect retirement vehicles.

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By Jing Pan Aug. 25, 2022

Despite the Fed’s aggressive rate hikes, savings accounts still don’t pay all that much. Even a seven-figure nest egg may not be enough to generate the income required to support a comfortable retirement.

That’s why retirees should consider an overlooked aspect of the stock market: closed-end funds.

What is a closed-end fund?

Closed-end funds raise capital by issuing a fixed number of shares that are not redeemable. These shares can be purchased and sold in the market, but no new shares can be created.

One benefit of having this structure is that managers of closed-end funds don’t have to set aside a large cash reserve to pay back shareholders who want to redeem their shares. When there’s a market downturn and investors are rushing for the exits, open-end fund managers may have to sell assets at a discount to raise cash to meet investor redemptions.

Meanwhile, closed-end fund managers can simply “buy the dip.”

Moreover, in an era of suppressed yields — the average S&P 500 company pays just 1.6% at the moment — some closed-end funds still offer oversized distributions.

Here’s a look at two particularly generous ones.

Nuveen Real Estate Income Fund (JRS)

There is a reason why many investors tend to gravitate towards real estate: it has created more wealth than all other asset classes combined.

It also acts as a hedge against inflation: as the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.

As rental prices go up across the country in this inflationary environment, real estate investors have an opportunity to earn increased income.

Nuveen Real Estate Income Fund is a closed-end fund focusing on this particular sector. Its objective is “high current income and capital appreciation.”

The fund invests in income-producing common stocks, preferred stocks, convertible preferred stocks, and debt securities issued by companies in the real estate sector.

Notably, at least 75% of assets managed by JRS will be invested in investment-grade rated securities.

As of June 30, the fund’s top five industries were specialized REITs (21.3%), residential REITs (21.1%), office REITs (14.9%), retail REITs (14.5%), and industrial REITs (12.3%).

JRS pays quarterly distributions of 20.90 cents per share, which translates to an annual yield of 8.6%.

The fund has a net asset value of $10.12 per share and a share price of $9.72 — meaning it’s trading at roughly a 4% discount to its NAV.

Where should $100k+ portfolio's invest in?

Tekla Healthcare Opportunities Fund (THQ)

Healthcare serves as a classic example of a defensive sector thanks to its lack of correlation with the ups and downs of the economy.

Income-seeking investors can use Tekla Healthcare Opportunities Fund to tap into the sector.

This closed-end fund invests across all healthcare sub-sectors and across a company’s capital structure. Its largest sector exposures were pharmaceuticals (29.0%), health care providers & services (24.7%), biotechnology (13.7%), health care equipment & supplies (13.6%), and medical devices and diagnostics (5.6%) at the end of June.

You can find many industry heavyweights in THQ’s portfolio, such as UnitedHealth Group, Johnson & Johnson, AbbVie, Pfizer, and Cigna.

Here’s the neat part: While most dividend-paying companies follow a quarterly distribution schedule, Tekla Healthcare Opportunities Fund pays shareholders on a monthly basis.

Right now, the fund has a monthly distribution rate of 11.25 cents per share, which comes out to an annual yield of 6.7%.

THQ currently trades at $20.09 per share — around a 7.5% discount to its NAV of $21.73 per share.

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About the Author

Jing Pan

Investment Reporter

Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.

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