3 Closed-End Funds to Maximize Dividend Payments

Key Points

• Closed-end funds can offer high monthly dividend yields while diversifying away the company-specific risk tied to individual high-yield stocks.
• ETJ, MEGI, and ARDC provide yields of 9.3%, 9.9%, and 10.9%, respectively, but each carries distinct fees, strategies, and risks.
• Investors should weigh trade-offs such as MEGI's 2033 liquidation date, high expense ratios, and exposure to below-investment-grade debt in ARDC.

Ultra-high dividend yields for individual stocks may appeal to investors seeking additional income—after all, who doesn't want high dividend payments? At the same time, though, a very high yield can sometimes be a giant red flag for investors. If the yield is high because of a value trap in which the price of the stock is failing and the company is distressed, there is a growing risk of either a dividend cut or a continued decline to share price, or both.

One alternative is a fund that spreads that company-specific risk across a broader basket of firms. The funds below are all closed-end funds, meaning each has a fixed number of shares and a price that may deviate from its underlying net asset value (NAV). Closed-end fund investors take on additional risks due to the structure of these products, but they are particularly well-suited to income generation. Like a traditional exchange-traded fund (ETF), they offer greater diversification and ease for investors not interested in actively managing their own portfolios—but unlike most ETFs, each of these funds makes monthly distributions, ensuring that investors get access to dividend payments quickly and regularly. Together, these factors make high-yield closed-end funds often a more compelling way of accessing dividends than individual stocks.

A Closed-End Fund With High Fees and Higher Income

First up on our list: the Eaton Vance Risk-Managed Diversified Equity Income Fund NYSE: ETJ. Closed-end funds often have eye-catching dividend yields, and ETJ is no exception. This fund provides a yield of 9.3%.

ETJ's unique strategy combines a portfolio of traditional stock investments with out-of-the-money, short-dated put and call options on the S&P 500 index. It has traded at a discount to NAV fairly consistently for the last several years, and it makes monthly payments thanks to its options strategy component.

This fund only has 57 distinct holdings, though they are distributed across several different sectors, with information technology representing the largest share at about 39% of the portfolio. Thanks to its distinctive structure and actively managed approach, ETJ requires a fairly robust fee commitment from investors: the fund charges an annual fee of 1.12%.

Compared to most ETFs this is exceptionally high, but investors may be more willing to pay in this case because of the substantial yield this fund offers.

A Utilities-Heavy Infrastructure Bet With Some Quirky Design Elements

Another closed-end fund for dividend yield pursuers, the NYLI CBRE Global Infrastructure Megatrends Term Fund NYSE: MEGI offers a 9.9% yield. Unlike ETJ, MEGI uses a thematic portfolio design structure that focuses on companies involved in decarbonization, digital transformation, and asset modernization within the infrastructure space. It often trades at a discount to NAV of between 7% and 9%.

Within MEGI's portfolio of stocks are a variety of global energy, railway, communications, and other infrastructure companies. Utilities stocks—with their already-high dividends—make up the largest share of the portfolio at more than 59%. The result of this basket is a substantive monthly dividend tied to a vital and typically stable part of the market. MEGI's annual fee is even higher than ETJ's at 1.44%, which may deter some price-conscious investors.

An interesting feature of MEGI that long-term investors should keep in mind is that the fund is structured with a pre-defined liquidation date in 2033. This means that as of Dec. 15 of that year, MEGI will be dissolved.

Although this is years in the future, those looking to buy and hold a dividend-paying fund may want to keep this in mind.

One of the Top Dividend Yields in the Space, But With Trade-Offs

Third on the list is another closed-end fund, the Ares Dynamic Credit Allocation Fund NYSE: ARDC. This product offers a dividend yield of 10.9%, the highest on our list. Unlike the other closed-end funds above, ARDC seeks risk-adjusted total returns in addition to dividend income. Its portfolio primarily consists of high-yield bonds, senior loans, and collateralized loan obligation products.

Investing in bonds of companies whose debt is below investment grade—and in various derivatives—carries a higher level of risk than many investors are willing to take on themselves.

ARDC is a way to entrust a dedicated team to manage these investments, although investors should still beware of the risks these underlying products entail. Still, for many the trade-off may be well worth it given ARDC's industry-leading yield.

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