Forget Dividends: Here’s a Better Way to Make Passive Income | Smart Change: Personal Finance
When the topic of passive income comes up, many investors will immediately consider dividend stocks. And rightly so. The best dividend stocks can generate reliable annual income with very little effort on your part.
However, let me offer a different angle. Forget buying individual stocks. This is a better way to make passive income.
Less popular alternative
You have no doubt at least somewhat familiar with mutual funds. You are probably well acquainted with exchange-traded funds (ETFs). But there is a kind of hybrid between these two types of chests that you may not have heard of often.
Closed funds (CEFs) are a special type of mutual fund. The term “closed end” is used because a fixed number of shares are issued up front to raise capital. Unlike open mutual funds, no new shares will be issued. CEFs are also similar to ETFs in a major way: they can be bought and sold on major exchanges.
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Like most mutual funds, CEFs are actively managed. Portfolio managers for these funds usually focus on investments that generate exceptionally high incomes. Over 200 CEFs offer distribution returns of at least 5%. More than half of them have distribution returns of 7% or higher.
One of the main advantages of CEFs over buying individual dividend stocks is that they are more diverse. Funds often have a large number of holdings. Also, CEFs have greater access to higher-yield investments that many small investors do not have, including corporate bonds and preferred stocks.
Some good examples
CEFs come in several flavors. You can mix and match to suit your individual preferences.
Some funds focus primarily on bonds. For example, file Alliance Bernstein Global High Income Fund (NYSE: AWF) It mainly invests in corporate bonds with some government bonds also being offered. CEF’s dividend yield is currently over 8%. It also trades for less than the net asset value – the fund’s total assets minus its total liabilities.
For investors interested in the preferred stock, Nuveen Premium Stock & Income Fund (NYSE: JPS) Stand out as a potential candidate. CEF invests at least 80% of its funds in preferred stocks and other income-producing assets. The fund’s distribution yield is approximately 7.8%. They trade at a discount to their NAV of more than 7%.
Very few CEFs own a wide basket of dividend stocks. The Aberdeen Global Dynamics Dividend Fund (NYSE: AGD) Good example. This CEF invests in dividend stocks across a wide range of industries. The income generated by the use of leverage (borrowing). The fund’s distribution is currently over 8.3%. It also trades at a discount of more than 11% of its NAV.
Maybe not completely Forget dividends
There are plenty of other CEFs to consider other than the above examples that offer rich returns. This money can be a great way to generate significant passive income.
However, the biggest drawback to CEFs is that you have to pay an annual fee. Many of the top CEFs have spending percentages of around 1%. But the additional extra income they can generate often makes the fees worth the extra cost.
Because of these fees, you may not like it completely Forget about individual dividend stocks. Some dividend stocks have attractive returns such as those of the highest CEFs without additional expenses. There are many great dividend stocks that investors can buy and hold securely.
However, not every investor has the time to research and buy enough of these stocks to be well diversified. If you are in this group, CEFs can provide a better passive income option.
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.