Investment Strategies for Steady, Passive Income: Explore Closed-End Funds, Dividend Growth, and Short-Term Bonds (Conclusion)
Cashing In on Regular Passive Income: Top Investment Opportunities Revealed
The allure of quick riches from the stock market might be tempting, but it usually ends up in a total wipeout. But fret not! You can still invest to yield capital gains or, better yet, a consistent flow of income from your investment returns - aka that illustrious "passive income" everyone's talking about.
Investing to generate this passive income you can enjoy while you snooze can be achieved through various asset classes. In this post, we'll delve into three of the hottest options for 2023: Closed-End Funds, Short-Term Bonds, and Dividend Growth Stocks.
Closed-End Funds: Your Gateway to High Distributions
Those who crave high and flexible distributions should familiarize themselves with closed-end funds (CEFs). These overseas-based funds offer distribution yields ranging from 4% to 9%. Each fund employs a unique and sometimes unrelated strategy to generate income.
Some CEFs invest in licenses or join lawsuits, while others assemble equity portfolios and engage in options trading. Others, such as the Round Hill Music Royalty Fund, dip their toes in the fascinating world of music rights, acquiring rights to tunes from Elvis and company3.
Unleash Your Inner Risk Taker: Short-Term Bonds
For risk-averse investors, short-term bonds might be just the ticket. Typically, an exchange-traded fund (ETF) serves as the investment vehicle to invest in a bond that matures within one to three months1. This significantly reduces bond risk, although it does slash yield. Risk tolerance dictates the choice between government bonds and corporate bonds like the PIMCO Short-Term High Yield Corporate Bond ETF2.
Patience Is a Virtue: Dividend Growth Stocks
Those who aren't in a hurry for passive income can also dive into the intriguing world of dividend growth stocks. Invest early, and you could reap double-digit returns through regular dividend increases. Microsoft, for example, has significantly boosted its dividend in recent years4. A wealth of such stocks can be found here5.
Want more? Check out the other installments in our series on passive income:
- Boosting Your Bank Account: REITs, Pipelines, and Bonds (Part 1/4)
- Unleashing the Power of Dividends: US Stocks, REITs, and Convertible Bonds (Part 2/4)
- Crossing the Atlantic: European Stocks, Government Bonds, and ETFs (Part 3/4)
Full Disclosure: Potential Conflicts of Interest
The author holds positions in the following financial instruments mentioned in this publication or related derivatives: Microsoft
:speech_balloon:More about closed-end funds in our enrichment data
Enrichment Data:
Closed-End Funds (CEFs):
Overview
- Structure: CEFs are in essence investment companies that issue a fixed number of shares (similar to stocks) and trade on stock exchanges or over-the-counter markets, unlike open-ended funds like mutual funds or ETFs.
- Investment Range: CEFs can invest in various securities, including stocks, bonds, municipal bonds, and even less liquid assets, allowing them to create portfolios that generate income through dividends and interest.
Income Generation
- Dividend and Interest Income: CEFs generate income by investing in dividend-paying stocks and bonds, which they distribute to shareholders as regular dividends.
- Leverage: Many CEFs use leverage to amplify returns and increase income potential. However, this also boosts risk, as it involves borrowed money to invest in securities.
- Discount to Net Asset Value (NAV): CEFs often trade at a discount to their NAV, presenting an opportunity for potential price appreciation if the discount narrows.
Types
- Traditional CEFs: Listed on stock exchanges, these are the most common type and are utilized for various income-generating securities.
- Interval Funds: Unlisted and continuously offering shares at the net asset value, interval funds provide liquidity through scheduled repurchases.
- Business Development Companies (BDCs): BDCs invest in small businesses and offer income through debt and equity investments.
Considerations
- Consistency: CEFs offer consistent income through regular dividend payments, appealing to investors seeking predictable cash flows.
- Risk: Despite the income potential, CEFs also carry risks such as market volatility and leverage, which can impact returns.
- Diversification: Investors can use CEFs as part of a diversified portfolio to manage risk while generating income.
Investing in closed-end funds (CEFs) could be an opportunity to yield high distributions, as they offer distribution yields ranging from 4% to 9%. Some CEFs engage in various strategies such as investing in licenses, joining lawsuits, assembling equity portfolios, and even trading options.
Short-term bonds might appeal to risk-averse investors seeking a way to mitigate bond risk while still generating income. Short-term bonds can mature within one to three months, but the yield tends to be lower compared to other options.
