JamesBrey
Monthly dividends are very popular with income investors due to the regular stream of cash flow that helps to boost spirits during market downturns and also makes monthly budgeting easier for those striving to live off of their dividend passive income.
Investing in monthly paying high-yielding closed-end funds (i.e., “CEFs”) can further enhance the benefits of investing in monthly paying dividend stocks by providing investors with:
- Greater safety from broad diversification within each CEF
- Enhanced yields due to the funds using leverage
- Passive exposure to professional active management
- The chance to buy funds at a discount to NAV and then – if they desire – sell once the fund trades at a premium to NAV, further compounding the returns of the fund.
In this article, we will discuss four CEFs that offer very attractive monthly dividends and appear poised to soar higher in the near future.
#1. Cohen & Steers Quality Income Realty Fund (RQI)
As we detailed in our recent article, the REIT sector (VNQ) is a very attractive place to invest right now because:
- REITs are heavily undervalued right now relative to the private market value of their underlying assets.
- Leading alternative asset manager Blackstone (BX) is buying REITs hand-over-fist right now, recently acquiring Tricon Residential (TCN) and Apartment Income REIT (AIRC), sending a powerful signal that REITs are likely undervalued right now.
- Moreover, the Fed appears likely to cut interest rates at some point this year, and the market is currently pricing in fairly substantial rate cuts over the next few years. Rate cuts are almost always an overwhelmingly bullish macro tailwind for the REIT sector.
While some investors favor simply investing in monthly-paying blue-chip REITs like Realty Income (O) or Agree Realty (ADC), RQI offers investors an attractive way to bet on this bullish outlook for REITs because it:
- Currently trades at a ~6% discount to the net value of its underlying securities.
- Offers investors an 8.2% dividend yield (which is meaningfully higher than what O and ADC offer).
- Employs ~30% leverage, thereby amplifying upside during a bull market for REITs relative to the performance of the underlying REITs in its portfolio.
#2. Cohen & Steers Infrastructure Fund (UTF)
As we detailed in our recent piece, infrastructure is an attractive place to invest right now due to five major macro tailwinds: (1) aging demographics that are driving increased investment demand for stable income-generating assets such as infrastructure, (2) enormous demand for additional infrastructure development across the global economy, (3) significant demand for data infrastructure due to the rise of artificial intelligence and the fourth industrial revolution, (4) deglobalization and decoupling from China by the West, thereby driving demand for additional supply chain and manufacturing-related infrastructure, and (5) the decarbonization of the global energy supply chain is driving substantial demand for new clean energy infrastructure.
While we like Brookfield Infrastructure Partners (BIP)(BIPC) and Brookfield Renewable Partners (BEP)(BEPC) as dividend growth investment opportunities in the infrastructure space, UTF offers investors some different advantages relative to Brookfield’s (BN)(BAM) subsidiaries:
- Currently offers investors a much higher yield (8%) than BIP and BEP offer.
- Pays its dividend monthly, as opposed to quarterly.
- It employs ~30% leverage on top of its underlying holdings, thereby providing greater upside potential in a bull market for infrastructure stocks.
- It offers much greater diversification with its 244 holdings than BIP and BEP provide to investors.
#3. Reaves Utility Income Trust (UTG)
UTG is another monthly-paying CEF in the infrastructure space that is also worth considering. Moreover, its dividend yield is a bit higher than UTF’s at 8.5%, it trades at a slightly cheaper valuation relative to its NAV, and it offers lower leverage (~20%) than UTF does. For investors who want to be a bit more aggressive, UTF is probably a better choice, given its 30% leverage and greater exposure to growthier parts of the infrastructure space.
Meanwhile, for investors who want to be more defensive, UTG is probably the better option, as it employs less leverage and has significantly greater exposure to the more defensively positioned utility sector (XLU) than UTF does (72% for UTG vs. 40% for UTF).
#4. Neuberger Berman Energy Infrastructure and Income Fund (NML)
Finally, while the midstream sector (AMLP) has been in a strong bull market for several years now with the likes of Energy Transfer (ET) and Plains All American (PAA) delivering market-crushing total returns, the fundamentals for it remain pretty strong, as we recently detailed. As a result, the opportunity to buy a well-diversified fund of midstream businesses at a 15% discount to NAV and a 9.5 %-yielding monthly dividend looks very attractive.
Moreover, it utilizes a fairly conservative amount of leverage (~17%) and its largest holdings consist of some of the most attractive midstream businesses of the moment, such as ET, Enterprise Products Partners (EPD), Western Midstream (WES), and Williams Companies (WMB). As a result, investors can get a discounted exposure to the best of midstream without taking on too much leverage risk, making this an attractive high-yield value investment.
Investor Takeaway
As with all investments, there is no free lunch, and CEFs do come with their drawbacks, such as:
- High expense ratios.
- Substantial leverage (in many cases) which cuts both ways.
- Highly diversified portfolios that bring with them plenty of low-quality stocks that weigh on the overall total returns of the portfolio.
As a result, we continue to favor investing in individual stocks in each of these sectors. However, for investors who want to juice their yields, receive monthly dividends, and enjoy the broad diversification and passivity that come with CEF investing, these four picks look like reasonable choices.
