How this 10.4% dividend strategy crushed the 60/40 portfolio

I hate to hear about investors using “rules” like the 60/40 portfolio (where you dedicate 60% of your holdings to stocks and the rest to bonds) to invest their hard-earned money.

The problem with “rules” like this is that they don’t have the ability to adapt to changing markets, like the mess we’ve been through this year, which hit stocks and bonds. in equal measure.

Advisors see light on oversimplified ‘rules’ like 60/40 portfolio

It seems that advisors and the business media are ultimately accept this hard truth. Recently, banks like Goldman Sachs (GS) and JPMorgan Chase

& Co. (JPM)
urged customers to move away from the 60/40 configuration, while posts like Barrons and Kiplinger write articles literally titled “The 60/40 portfolio is dead”.

It’s great to see, but if they truly served their clients (and readers), they’d go one step further and recommend our go-to income games, Closed Ended Funds (CEFs).

They are a much better alternative, for one simple reason: they pay dividends high enough that many people can live without having to sell a single stock in retirement. With hindsight, you can easily find CEF yields north of 10% these days, while trading at deep discounts to net asset value (NAV, or the value of their underlying portfolio holdings).

Once your bills are paid, you can sit back, collect your dividends, and essentially ignore stock price movements, or better yet, you can use strategies like dollar cost averaging to reinvest your payments and “automatically” profit. bargains that hindsight has served.

CEF: purpose-built to weather market storms

To explain how high-yielding CEFs help investors during bear markets, let’s take the example of John and Jack.

John has a 60/40 portfolio, as his financial advisor recommended: 60% stocks, 40% Treasury bills. Jack, on the other hand, has put his money into CEFs, specifically the Liberty All-Star Equity Fund (US), PIMCO Corporate & Income Opportunity Fund (PTY) and the Cohen & Steers Quality Income Realty Fund (RQI).

This 10.4% yielding portfolio has generated a nice average annualized return of 8.9% over the past decade (even after the market decline in 2022).

He also easily beat the 60/40 portfolio (in purple below), with an average total return of 129% between Jack’s three funds, compared to 87% for the BlackRock 60/40 Target Allocation Fund (BAGPX), a good indicator of our 60/40 stock-bond split.

But what’s really important is that these funds provide a high income stream: $86.67 per month (or $1,040 per year) on every $10,000 invested, based on their current yields and payouts. Also note that their dividends continued in two of the toughest bear markets in recent memory: the COVID-19 sell-off and the volatility of 2022.

60/40 investors, on the other hand, would not have this cash cushion.

While the CEF investor has the same number of shares (and therefore the same amount of upside potential) at the start and end of the period, the 60/40 portfolio has experienced a significant loss in value due to the decline in 20% of its value and the withdrawal of the investor. This means that while the CEF portfolio needs to gain 25% to get back to where it started before the bear market, the 60/40 portfolio needs to rise 34%.

The longer a bear market lasts, the worse this effect becomes. Because the number of stocks remains constant, a 20% decline for a CEF portfolio means that a 25% recovery is needed to get back to its starting point, whether we are talking six months, a year or more. .

But with the 60/40 portfolio, you are actively withdrawing money from your portfolio during a bear market, so the longer the market stays down, the more you need to earn to make your initial investment full again. So a required rebound of 34% in six months turns into 44% in a year, and it gets worse the longer the decline lasts.

Of course, no one likes to see unrealized losses in their account. But the good thing about CEFs is that their outsized income streams mean you don’t have to sell stocks and make those short-term paper losses real. And you have the flexibility to reinvest your dividends if you wish, picking up some bargain-priced CEF shares in the process.

Michael Foster is Senior Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 8.4%.

Disclosure: none

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