Unlock Financial Freedom in 2025: Earn 8.4% Dividends and Thrive!

Welcome to 2025, where a golden opportunity awaits you: the chance to step into a fulfilling retirement, armed with a hefty savings pot of about $1.1 million. And get this—this dream can become a reality without touching a dime of your savings.

Sounds enticing, right? Depending on your situation, you might even retire with significantly less.

Now, I know this may clash with the traditional narrative we’ve been fed for years—that we have to grind through our sixties, or beyond, before we can finally wave goodbye to our 9-to-5 commitments. Yet, every now and then, we hear inspiring stories of people who shatter this myth.

Take, for example, a former chef and small-business owner who retired back in 1991 with a modest $500,000 investment. Adjusting for inflation, that’s roughly equivalent to $1.1 million today. While many might scoff at the idea of retiring on that sum, especially considering the often-cited 4% rule, which suggests a safe withdrawal rate of only 4% of our savings in retirement, there’s more to the story.

For a couple living on $1.1 million, that translates to a meager $22,000 each year—or about a third of the average American salary. That’s a combined total of $44,000 per year. Not exactly the lifestyle most dream of!

However, if they had invested that money in a closed-end fund (CEF), we could see a drastically different scenario. By tapping into the potential of such funds, they could rake in an impressive $92,400 in annual dividend income—without ever touching their nest egg. That’s an astonishing 8.4% yield that has not only remained stable but has actually grown over the years.

Now, let’s be clear: I’m not advising you to dump all your savings into just one fund, no matter how tempting it may seem. This example is merely to highlight the income potential of CEFs, which typically yield around 8% on average.

In fact, many CEFs exceed that, with the average fund in our CEF Insider portfolio currently boasting a jaw-dropping yield of 10.1%. If you were to spread your savings across these funds, you could be looking at a staggering $111,100 in dividends from your $1.1 million investment. Or perhaps you could start with a more modest amount of around $919,000 to net that $92,400 in annual dividends.

But let’s take a closer look at that single fund I mentioned earlier to understand how it can maintain (and even elevate) that 8.4% income stream effortlessly.

The Engine Behind the 8.4% Payout: A Deep Dive into Preferreds

The fund in question is the Cohen & Steers Tax-Advantaged Preferred Securities and Income Fund (PTA). Sure, the name is a mouthful, but the magic lies in the fact that PTA specializes in preferred stocks.

Preferred stocks are essentially “hybrid” instruments, combining features of both stocks and bonds. While they trade like common stocks on exchanges, they behave more like bonds with fixed dividends. As interest rates drop, the value of these dividends climbs, making PTA’s holdings increasingly valuable. Talk about a win-win!

Major banks and financial institutions are typically the issuers of preferreds, which is why you’ll find names like Wells Fargo, Citigroup, and Charles Schwab among PTA’s top holdings.

While the high yields of preferreds primarily fuel PTA’s attractive 8.4% payout, there’s another critical factor at play: PTA’s current discount to its net asset value (NAV)—a unique feature of CEFs.

Here’s how it breaks down: CEFs operate with a fixed number of shares, and since those shares trade publicly, their market price can fluctuate above or below the NAV of their holdings. Right now, PTA’s shares are trading at a discount of 7.9%, a notable increase from just 2% a few months ago.

This discount means PTA only needs to earn 7.8% from its collection of preferred stocks to sustain its generous dividend payout, even though it pays out 8.4% based on market price.

Plus, it’s worth mentioning that PTA recently raised its payout in late 2023 and has never slashed its dividends since inception:

Even that 7.8% is a solid dividend yield. But how is it sustainable? This chart explains it well.

This chart illustrates the average yield of high-yield corporate bonds, which currently stands at 7.3%, with fluctuations above 9% over the past three years. PTA has capitalized on these prevailing interest rates over the past three years to build its portfolio of preferred stocks. While preferreds and high-yield bonds are different animals, they both compete for the same investor dollars, attracting similar creditor profiles, like hedge funds.

This competitive landscape means that yields on preferred stocks often mirror those of high-yield bonds. For instance, you can see a similarity in current yields between the benchmark SPDR Bloomberg High Yield Bond ETF (JNK) and the iShares Preferred and Income Securities ETF (PFF), both of which yield around 6.5% right now.

Thanks to its adept human management, PTA has been able to secure even higher-yielding preferred stocks, ensuring its overall payouts to shareholders remain robust and sustainable.

So, to wrap it up, we’re definitely not advocating going “all in” on PTA. But the key takeaway here is that high-yield funds like this can be pivotal in accelerating your journey to financial independence, especially when you diversify across CEFs with sustainable yields trading at significant discounts to their true market value.

For those eager to explore more income-generating ideas, we’ve got your back!

Disclosure: none