The first half of the year has seen surprising returns from high-yield closed-end funds (CEFs), with the CEF Insider Equity Sub-Index showing a 12% return year to date, surpassing the expected 8.5% return for the entire year. This has proven to be a boon for investors who have been investing in CEFs, as they have likely enjoyed healthy returns. For those on the sidelines, it is not too late to jump in and benefit from the potential gains that CEFs can offer.
Long-term investments in stocks have historically provided significant returns, with the S&P 500 averaging an 8.5% annualized return over several decades. Wealthy investors often diversify their portfolios with corporate bonds and real estate to provide a cash cushion during lean years. Real estate stocks, in particular, have shown to be a valuable asset to have during downturns, as they can provide steady income even when stock markets are flat.
Investors with a diversified portfolio that includes real estate investment trusts (REITs) have experienced an average annualized return of 7.7% during periods when stock markets were flat. Over the long term, both stocks and real estate tend to settle around an 8.5% annualized return, making them complementary assets to build wealth steadily. CEFs, which offer an average yield of 8.2%, can provide broad diversification and a high-quality asset mix that can translate into consistent dividends over the long term.
Some of the top-performing CEFs with long track records include the Adams Diversified Equity Fund (ADX), Central Securities Corporation (CET), and General American Investors (GAM). These funds offer varying yields, with ADX currently yielding around 7.7%, while GAM and CET yield closer to 5%. Investors with a long time horizon may prefer funds like GAM and CET, which aim to provide stable income by limiting the percentage of portfolio profits distributed to investors. On the other hand, ADX may be more suitable for investors relying on their portfolio for immediate income.
With CEFs offering higher yields compared to index funds and holding many of the same companies, the choice for investors is clear. CEFs can provide a steady income stream and long-term growth potential, making them an attractive option for those looking to build wealth over time. By diversifying their portfolio with high-yielding assets like CEFs, investors can position themselves to benefit from the potential gains that these funds can offer.
