收入实验室想法：再投资在您的投资组合中的巨大作用

Reinvesting distributions and dividends are one of the best ways to boost total returns over time.

Even reinvesting a portion of your portfolio during the distribution phase of an investor\'s life can have a huge impact.

Today we are focusing on those specific benefits to an investor, including those in both the distribution and accumulation phase.

One of the main things that is brought up many times during discussions about investing are dividends and dividend reinvesting. Today I wanted to illustrate exactly why reinvesting and compounding returns is such a powerful punch to an individual's portfolio. Over time this can add up to a large disparity between investors that choose to spend the cash versus those that choose to put the money back to work. I'm especially putting a focus on closed-end funds that typically carry higher yields than ETFs and individual stocks. CEFs can significantly help an investor with diversification as well. The funds themselves can hold potentially 100's of different companies within the fund. Another benefit of CEFs is that there are many that payout their distributions monthly. The faster rate of compounding is a key benefit over time. Although a solid investment shouldn't be disregarded completely just because it doesn't pay monthly.

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I will focus on both the distribution and accumulation phases, highlighting the potential impacts on investors in either scenario. As we will quickly find out, even reinvesting a portion of an investor's portfolio can have a huge impact on the outcomes. The key benefit here is that you are giving yourself a raise year after year. This helps to limit or outright stop the negative effects of inflation over time.

There will be several CEFs referenced throughout this article too, they shouldn't be mistaken as recommendations to either buy or sell. They will merely be included for hypothetical and illustrative purposes. If I own a position that is mentioned I will be sure to note this in the disclosure that accompanies every article. Every individual's circumstances and needs are different and therefore the strategies highlighted may not be for every reader.

And why are CEFs a great source for income? They produce outsized yields compared to other security types. They can do this for a few reasons. One of the reasons being is that they distribute out net investment income, short or long term capital gains and even return of capital in some cases. These are all distributed out throughout the year in, generally, equal payments. This is dependent on the fund's managed distribution policy if they have one or not.

Another reason they can have a larger than usual payout is due to utilizing leverage. This can be done either by borrowing debt or issuing preferred shares. A couple of examples of this are Reaves Utility Income (UTG) and Gabelli Equity Trust Inc. (GAB). UTG has total net assets of $1.678 billion, as of their latest Semi-Annual Report. However, they also have borrowings of $445 million, making total managed assets at that time $2.123 billion. GAB has total common assets of $1.5 billion, but issues preferred shares of approximately $400 million in value. These preferred issues are traded on an exchange just like the common shares. A couple of examples currently that they offer are Gabelli Equity Trust Inc., 5.00% Series H Cumulative Preferred Share (GAB.PH) and 5.875% Series D cumulative Preferred Shares (GAB.PD).

These borrowings or issues are then used by the management to potentially enhance returns and income. The hope is to see a return above and beyond the cost of the leverage. However, this does add additional risk to the funds. This is because during recessions these instruments tend to be a drag on performance because they

cannot outearn what they are costing the fund. Additionally, NAV would be dropping faster due to the added investments that debt provided the fund.

Other strategies that a CEF can use are options strategies. These are typically carried out by writing calls. Writing calls on the underlying holdings of the fund can help generate options premium. This premium is then collected by the fund and paid out to shareholders. The option premium is generally accounted for as ROC to an investor. In the right funds, this ROC is merely for tax accounting rules and not "destructive" ROC. Destructive ROC would occur when the fund pays out too much to shareholders. The fund then ends up eroding the NAV of the fund by paying out over what the fund can sustain. Some funds write calls on indexes such as the S&P 500 or NASDAQ. Some of the more popular funds in this category are from Eaton Vance (EV). These include Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV) and Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW).

The below tables and calculations will have several assumed scenarios. They are based on a portfolio that yields 8%, compounded/reinvested monthly and flat share prices. Generally, CEFs that pay higher yields don't witness share appreciation over time as an individual stock may. Funds with higher yields are also more at risk for market downturns. Higher yields could lead to possible distribution cuts. This is why I chose the 8% mark, as it is quite an achievable and sustainable distribution rate.

The other thing that the charts assume is a static portfolio. This is in contrast to what we do at CEF/ETF Income Laboratory, where we execute our "compounding income on steroids" strategy. Essentially, swapping out funds looking for a reversion to the mean in CEFs. These opportunities present themselves quite often and can generate significantly higher returns as well! So, with that being said, we aren't calculating those impacts on the returns in the following tables. This is why I believe that it is quite reasonable to be able to use an 8% yield that is compounding monthly.

Even the compounding monthly may not always be the best assumption either. Personally, I wait until a pullback or correction before really loading up. This will put an investor in a better position, with potentially higher yields as prices are depressed.

Additionally, we have our Income Generator portfolio at the Lab that targets an 8% yield. The current yield of that portfolio is 8.02% at the time of writing, to be exact. That is considering almost 10% is allocated to cash though.

Beyond that, there is the Cohen & Steers Closed-End Opportunity Fund (FOF) that uses a 'fund of funds' approach. FOF currently has a distribution rate of 8.19%, close to what we are targeting for this exercise. Over the last 10-year period FOF has managed to put up annualized returns of 10.14% on their NAV and 10.32% for their market price. Since inception, the fund is only showing 5.84% annualized NAV returns and 5.34% for market returns. However, given the fund's inception date of 11/24/06, I think it is fair to say the fund didn't get the best couple of years to begin with.

General market volatility will accompany the market over time as well, guaranteed. Again though, this is only for illustrative purposes of what a portfolio could potentially look like over a long period of time.

The first scenario in focus is an investor that is in the accumulation phase. We can see that starting with a $50,000 portfolio we eventually can grow the portfolio to an ending value of $246,340.33. The low starting value of the portfolio was chosen because this may be for an investor that might just be getting started.

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Now, since the investor is in the accumulation phase, they are probably adding money to the account as well. So, the next table and chart show an investor that begins with $50,000 in a portfolio that yields 8%. Again, we are choosing to assume the investor is reinvesting monthly, therefore compounding monthly at a yield of 8%. But, we are now also throwing in the calculation that the investor is throwing an additional $10,000 in the portfolio annually. This is quite an achievable target. This works out to an investor putting in an average of $833.34 per month.

This calculation became quite tricky, so it was assumed that the additional $10,000 was invested in a lump sum. Therefore we are actually hindering the hypothetical outcome again. That is because it won't show that it was being compounded throughout the year and thus, not showing the potential "growth" of those funds for the year.

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We look at the same 20 year period and we can see the significant impact of adding "just" $10,000 annually or $200,000 over the course of the illustration. An investor would have put $250,000 of their "own" money in over the course of that time. We arrive at the final value of $719,452.14. And with a portfolio that could be throwing off $54,371.41 annually in income.

This can be compared with the original investor that didn't add any additional funds. This led to a $473,111.81 difference in ending value! Or about $273,111.81 when subtracting the additional funds put in overtime.

The next two illustrations will compare partial reinvestment of distributions and the impact over time. The first table and graph highlight if an investor is reinvesting 25% of their portfolio's assets. The second will be looking at an investor who reinvests 50% of their portfolio's assets.

I began with a portfolio value of $500,000 because this would probably be looking at an investor that is in the distribution phase of their life. Essentially, they would be drawing some of their portfolio income out for living off of.

On a side note, investment income is not considered for U.S. citizens when collecting Social Security. Therefore it will not reduce an individual's Social Security pay. This is applicable if you are taking early benefits.

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We can see that an investor that chooses to reinvest 25% can still significantly grow their assets over a period of 20 years. The additional growth in the portfolio allows the investor's income to actually go up 2.075% annually.

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Of course, what's better than reinvesting 25% is investing 50% back in. The difference is quite noticeable to say the least. The final values are a difference of $373,621.44 in potential value. The income at the end is also significantly impacted. As an investor has a much larger pool of assets to continue pulling 8% yields off of. The second investor is actually giving themselves a raise of 4.15% annually.

This is significant to help limit or stop the impact of inflation. The average annual inflation rate in the U.S. since 1913 is 3.22%. And of course, we are in a time of even lower inflation than that. The latest monthly data is showing U.S. inflation coming in at a lowly 1.8%. Additionally, the U.S. has not experienced inflation higher than 3% in the last 10 years. So, if an investor can give themselves a 4.15% annual raise, that is huge.

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To touch on the subject of those that spend every cent of their investment income and cannot afford to reinvest any portion of their portfolio. Many people do not have nearly enough saved for retirement. The median retirement account for those that are age 55-64 is only $120,000. The average retirement account value comes in at $374,000 for that same age group.

The 55-64 age group is an important demographic. Being that many begin to retire in this age range. Although, for those reading this far into the article, I would imagine that you are not the average saver or investor! However, for those that are in this predicament. I would strongly discourage anyone from trying to juice their income by reaching for yield. Meaning that one should not be tempted to buy those higher yielders that pay 12%+.

In fact, one may want to even tone down the risk and search for more stable distributions and dividends. This could include a CEF like UTG that was mentioned above, a fund that has been able to raise its distribution since inception (2/24/2004). Although, currently only yielding 5.97%. Another fund on the more stable side is John Hancock Tax-Advantaged Dividend Income Fund (HTD). The fund did cut its distribution during the financial crisis of 2008/09, so keep that in mind. But HTD was able to maintain a monthly distribution and raise several times since. Again though, HTD yields only 6.56%. The point is, one would not be encouraged to increase risk because of desperation.

The reasoning here is that the higher risk of a dividend or distribution cut will outweigh the potential (possibly temporary) benefits. If an individual is spending the total amount of their portfolio's income - there is also a good chance they will have to also begin dipping into the principal of their portfolio. This can then leave an investor with very little leftover if an emergency expense were to arise.

Some of these high yielders can be used by sprinkling them in with higher quality names in an overall portfolio. However, it isn't suggested if one doesn't have a strong core portfolio that is of adequate size in the first place.

The better alternative, if possible, would be encouraging those in this situation to try and pare down expenses. Additionally, if one can, potentially stay/reenter the workforce. This can have a major positive impact on one's finances during retirement. This allows one to accumulate more savings and potentially delaying Social Security payments until full retirement age. Although every individual is in a different situation and there isn't a specific answer for everyone.

The impact of reinvesting and compounding dividends and distributions cannot be overstated. It is truly a remarkable and easy way for an investor to boost total returns over time.

An investor may also choose a strategy of "compounding income on steroids." This allows an investor even greater potential returns over time. Buying funds that are relatively undervalued and selling funds that are overvalued. This allows for even more shares to be purchased over time as an investor's account balance grows between trades.

Even if an investor is in the distribution phase of their lives, reinvesting a portion of their assets can have a significant impact. It allows for limiting or in some circumstances, stopping the negative effects of inflation on your purchasing power. Any little boost could help, even if an investor can't do 25 or 50%!

I am/we are long ETV, FOF, UTG, HTD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.