This Is Like Buying An ETF (But With An 8% Dividend)

On the surface, investing through an index fund sounds great. It’s simple, cheap and, as you’ve likely heard over and over, few active managers beat their benchmarks anyway.

But we closed-end fund (CEF) investors know better. Truth is, there are lots of CEFs out there that beat their benchmarks while throwing off healthy dividends north of 8%.

And when you step beyond the world of stocks, into areas like corporate bonds, REITs and municipal bonds, benchmark-beaters are the norm with CEFs. That’s because those markets, which are much smaller than the stock market, give a savvy manager lots of advantages—like a well-stacked contact book—that a “robotic” index fund just can’t match.

But today I want to talk about equity CEFs. In a moment, I’ll show you one that’s crushed the S&P 500 over the last decade—and the gap is getting wider! Plus this underappreciated fund pays a dividend that’s averaged around 8% over the long haul.

I think you’ll agree that this is a much better way to invest than through an index fund like the Vanguard S&P 500 ETF (VOO)—especially since the average index fund only pays 2.1% today.

Forget Beating the Index—Even Matching It Is a Boon With CEFs

Before we get to that fund, consider this: even if you can just match an index with a CEF, you’re still way ahead, because you’re getting most of your dividend in cash, rather than “paper” gains. And we’re happy to take cash these days, with banking crises and an unpredictable Fed roiling the markets.

Consider, for example, a CEF called the General American Investors Company (GAM), which holds well-known names like Microsoft (MSFT), Berkshire Hathaway (BRK.A) and TJX Companies (TJX). Over the last three years, its total return (including dividends) has matched that of the market.

The key difference between it and VOO? The dividend: over this time, GAM has yielded an average of 8.3%.

(GAM, in fact, returns its gains as dividends by design—it aims to deliver all income and capital gains from its portfolio in any given year through its dividend, which it mostly delivers in the form of a year-end one-time payout.)

Sure, VOO got the same return more or less, but since investors were getting less than a 2% yield during their holding period, they had to time the market to not sell at a loss in order to generate cash they could use, in addition to dealing with the headaches, taxes and paperwork of juggling capital gains and income.

That’s a sharp contrast with GAM shareholders, who simply let the dividends drop into their accounts.

How About Beating the Index?

Now let’s get back to that fund I mentioned earlier—the Adams Diversified Equity Fund (ADX), a fund that members of my CEF Insider service will recognize. ADX’s portfolio is populated by strong S&P 500 companies like Alphabet (GOOGL), Visa (V) and UnitedHealth Group (UNH). The fund has been beating the index for a decade.

This trend began around the time CEO Mark Stoeckle joined Adams, bringing a new approach to ADX that has seen its performance soar. By focusing on large cap tech companies that had become deep-value plays, like Amazon.com (AMZN) and Alphabet (GOOGL), he weighted the portfolio toward high-growth stocks when they were undervalued. (In addition, Stoeckle is one of the nicest people in the CEF game, in my opinion, and has the loyalty of his employees.)

ADX currently trades at a big discount that has temporarily widened because of the problems at Silicon Valley Bank and Credit Suisse, even though both of these situations are now resolved (and ADX wasn’t exposed to either).

With an average yield of 8% over the last decade—similar to GAM (and a similar dividend policy)—ADX is a consistent income generator and just one of many great CEFs that get you market-beating returns and big income streams.

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 Steady 10.2% Dividends.”

Disclosure: none