Unlock 14% Dividends: My Winning Retirement Strategy for 2025!

Did you know that if you want to truly diversify and effectively manage your investments, dipping into closed-end funds (CEFs) is your golden ticket?

With CEFs averaging an impressive yield of around 8%, you’re not just gaining a substantial income stream; you’re setting yourself up for a financial advantage that traditional investments can’t match. Imagine reinvesting those dividends to shift your funds across various sectors. This flexibility? Not possible with a standard index fund.

Let’s explore this strategy in action.

2024 has been a rewarding year for stocks, yet some sectors are dragging their feet, as always. Now, as we pivot to 2025, it’s the perfect opportunity to shuffle some investments from your high-flyers into the underperformers. Historically, these lagging sectors tend to bounce back to their long-term averages.

When we dissect the S&P 500, it’s clear that communication services, finance, consumer discretionary, and tech have been the stars this year. Meanwhile, healthcare is lagging, with a mere 1.1% uptick after last week’s downturn. Let’s shine a spotlight on healthcare; the stark difference between its current performance and its historical strength is hard to ignore.

Healthcare: Short-Term Weakness Hides Long-Term Potential

With an impressive average return of 9% over the past decade, healthcare is ripe for rebalancing. By reallocating profits or CEF dividends from the stronger 2024 sectors into healthcare, you could be setting yourself up for future gains.

Consider the abrdn Healthcare Investors Fund (HQH), boasting a tantalizing 14.2% yield. This fund’s portfolio includes heavyweight pharma stocks like Gilead Sciences (GILD), Amgen (AMGN), and Eli Lilly & Co. (LLY). Just $705,000 invested in HQH could generate a staggering $100,000 annually!

Moreover, HQH allows you to diversify further by pairing it with other sector-specific CEFs, ensuring you’re not overly exposed to any one industry while capitalizing on performance variances.

But how do we determine if HQH is truly the best choice? Let’s dive deeper.

As of now, HQH outperforms the healthcare sector overall, with a 7.9% total net asset value (NAV) return year-to-date—seven times the return of the benchmark Health Care Select Sector SPDR Fund (XLV).

HQH’s Discount and Performance Insights

On the marketplace, HQH has delivered a solid 10.6% return, including dividends. This impressive figure is largely due to a significant discount to NAV, which was over 15% at the year’s start but has recently returned to a favorable position following the recent market selloff.

Now presents a prime buying chance, as market momentum could further shrink that discount in the coming months, especially if the recent panic subsides. If HQH maintains its dividend payout, we could see even more favorable pricing.

However, there are a couple of caveats: the market’s downturn may not be finished, and HQH raised its dividend in May, resulting in a current yield of 12.6% on NAV—considerably higher than the 7.9% total NAV return we mentioned. This raises concerns that the dividend may be at risk of cutbacks, or HQH might need to dip into shareholder capital, potentially stunting its growth.

Let’s pivot to the BlackRock Health Sciences Trust (BME), which offers a more modest 7% yield. While BME trades at a smaller 10.3% discount, the trajectory of this discount (in orange) contrasts sharply with HQH’s (in purple).

HQH has fluctuated from par value to a significant discount and back, while BME has shown a steady increase toward a larger discount. Yet, there’s an important caveat: BME is part of BlackRock’s “discount management program,” which initiates buybacks of certain CEFs when their average discount exceeds 7.5% over three months.

HQH lacks this safety net, hence its discount could widen unpredictably. BME is less likely to experience such a decline, and any dips would be addressed through BlackRock’s program, providing a stable investment opportunity.

Another compelling reason to lean towards BME over HQH—despite the lower yield—is its excellent track record. Over the last five years, BME has outperformed HQH based on total NAV returns. This suggests it deserves a tighter discount due to superior management, making it a more appealing long-term buy.

In conclusion, while HQH flashes its attractive dividends, if you’re looking for a solid hold in the sector for the long haul, BME might just be your winning ticket, especially with BlackRock’s robust management approach. Unless abrdn decides to implement its own discount management program, my money is firmly on BME.

Disclosure: none