How To Retire In Just 5 Years With These 3 Funds – Forbes

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Thinking of joining the Great Resignation crowd and dumping your 9-to-5 gig? Lets talk about how you can do it with outsized 7%+ dividends that easily keep the bills paid.

Im going to show you the powerful secret some of these quitters are using today. It all turns on a unique kind of asset called a closed-end fund (CEF) thatll be our source for those rock-steady 7%+ dividends (paid monthly, to boot!).

First off, a funny thing is happening as people dump their day jobs: theyre investing more, with the number of new investors jumping 15% in 2020, and scores of folks who already invest building out their portfolios further.

Some of that cash has flowed into CEFs, and its easy to see why: these potent income plays yield 6.9%, on average. As evidence of their new-found popularity, CEFs also trade at some of their narrowest discounts to net asset value (NAV) ever: just 1.5%, compared to 7.2% a year ago. Well delve into three specific CEFs with outsized dividends up to 10.8% below.

(By the way, the discount to net asset value, or NAV, is a quirk of CEFs that refers to the fact that these funds market prices often differ from the per-share value of their portfoliosand most trade at discounts.)

The investors whove found their way into CEFs are finding true financial freedom! Drop $100K into the typical CEF and youre looking at $6,900 paid out every yearand most CEFs (around 350 of the 450 or so out there) pay dividends monthly, so your payouts align with your bills.

An income stream like this changes the equation, because as soon as your passive income exceeds your bills each month, you can quit your job. This is, after all, how retirement works. And the more you save, the earlier you can retire.

Passive Income for Financial Independence

If we consider a worker who invests 10% of their wages in a CEF that gets them a 7% income stream, after one year, their passive income will cover 0.7% of their salary.

That doesnt sound like much, but look at how it goes up the more you save: 70% of your income invested means 4.9% of your salary is covered by passive income in a year. Add in a rate of return based on historical stock-market performance and reinvested dividends, and financial independence would come in just five years for someone saving that much.

Years to Retire on Passive Income

Of course, these numbers arent absolute. As mentioned, Im basing this on the long-term average return of the S&P 500, but youll want to diversify and focus on groups of assets that outperform the benchmark index (one of the funds well touch on below did just that, doubling up the S&P 500 since inception).

Second, most people dont need to cover 100% of their paycheck with passive income. Retirees dont need to spend money on commuting, for example. As well, they can often move to an area with a lower cost of living. Their tax burdens will often be smaller, too.

If you factor those into your own personal situation, you might find that saving half your income will get you financially independent much faster than the 9.1 years you see in the chart above.

The crux of all of this, of course, is that 7%+ income stream, so lets dive into three CEFs thatll get you there.

Our first pick is the BlackRock BLK Science & Technology Trust (BST), which, as the name says, is run by BlackRock, the worlds biggest investment manager, with $7 trillion of assets (and the top-notch management talent that such scale attracts).

BST, as the name also suggests, focuses on tech stocks, particularly large cap techs, with Apple AAPL (AAPL), Microsoft MSFT (MSFT) Amazon.com (AMZN) and Mastercard MA (MA) populating its top-10 holdings.

If we reinvest our payouts in BST while were taking our fast track to financial freedom, we can expect it to grow our nest egg (and future income stream) fast: as you can see, BST has doubled up the total return (or price gains plus reinvested dividends) of the benchmark SPDR S&P 500 Trust (SPY) SPY since its inception in 2014!

BST yields 5.4% today, which is a bit light for CEFs, but its dividend has grown 150% since inception in 2014 (it most recently hiked payouts in October). And we can expect that to keep coming, thanks to the funds soaring NAV, which is up 377% since inception and roughly 35% in the last year alone. A healthy slice of those portfolio gains will likely flow our way as dividend hikes.

Best of all, BST trades at a 4.5% discount to NAV as I write this, so youre essentially getting its portfolio of strong tech names for 95 cents on the dollar! That may not sound like much, but in todays pricey market, well take any deal we can get.

To diversify beyond the tech names BST holds, consider adding the Brookfield Real Assets Income Fund (RA), which yields an impressive 10.8%.

RA splits its portfolio roughly three ways between bonds, mortgage-backed securities and shares of infrastructure companies. Utility NextEra Energy NEE (NEE), its largest equity holding, stands to benefit from the Biden Administrations infrastructure and environmental spending. RA also holds growing mobile-network operators like T-Mobile USA (TMUS) and Crown Castle International (CCI).

This CEF does trade at an 8.9% premium to NAV, so we cant expect a whole lot more price upside here. But it has traded at higher premiums of 10%+ in the past few months, and were getting a baked-in 10.8% return from the dividend (which is paid monthly). This payout is also as solid as they come, having held steady through the COVID-19 crisis, giving shareholders the reliable income stream they needed to weather the storm.

Finally, well add exposure to government and corporate bonds through the 9.7%-yielding PIMCO Dynamic Income Fund (PDI), which has a broad mandate to invest in the fixed-income securities management sees as best positioned at any given time. Right now, PDI holds about a third of its portfolio in high-yield corporate debt; another third is in mortgage-backed securities; and the rest is held in emerging market, investment-grade and municipal bonds.

PIMCO is a leading name in CEFs, with the talent and expertise to produce some of the strongest funds on the market. Trouble is, everyone knows it, which is why PDI trades at a 9.2% premium as I write this. But this fund has traded at premiums as high as 16% in the past year, so we could still grab some nice upside to accompany our 9.7% payout.

That gets you a portfolio that yields 8.6%, which brings a passive income stream that could make you financially independent even faster than suggested in the scenario above. Someone saving half of their income now, for example, would only have to wait 6.1 years to retire, going by our earlier figures. Thats a lot better than the decades youd have to wait by investing in a low-yielding index fund.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report Indestructible Income: 5 Bargain Funds with Safe 7.3% Dividends.

Disclosure: none

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How To Retire In Just 5 Years With These 3 Funds - Forbes