Building a portfolio designed for sustainable, high-yield income has been one of my lifelong financial priorities. Over time, I’ve realized that consistently generating significant income requires discipline, an understanding of risk, and a long-term horizon. In this article, I share two yield-focused investment strategies I personally believe are worth buying and holding forever. These are not get-rich-quick schemes, but rather sound, income-generating assets backed by real financial models, economic rationale, and decades of performance data. I also explore their underlying mathematics, market performance, and practical implications for US-based investors seeking stable retirement income or financial independence.
What Do I Mean by “Fat Yield”?
When I refer to a “fat yield,” I mean a dividend or interest yield that significantly exceeds the S&P 500 average, which has hovered around 1.5% to 2% over the past decade. A fat yield typically starts around 6% and can go as high as 10% without exposing the investor to excessive risk. I avoid unsustainable high-yield traps and instead focus on assets backed by consistent cash flows.
Investment #1: Closed-End Funds (CEFs) Focused on Municipal Bonds
Closed-end funds (CEFs) are pooled investment vehicles that issue a fixed number of shares and trade on stock exchanges. They differ from open-end mutual funds because they are not continuously offered or redeemed at net asset value. This structural feature creates pricing inefficiencies that I exploit to capture higher yields.
Municipal bond CEFs, in particular, are appealing because they provide tax-exempt income. For investors in high federal tax brackets, the effective yield can be significantly greater than the nominal yield.
Example: Nuveen AMT-Free Municipal Credit Income Fund (NVG)
As of this writing, NVG trades at a discount to NAV and offers a yield of about 6%. For someone in the 32% federal tax bracket, this tax-equivalent yield can be calculated using:
\text{Tax-Equivalent Yield} = \frac{\text{Municipal Bond Yield}}{1 - \text{Tax Rate}} \text{Tax-Equivalent Yield} = \frac{0.06}{1 - 0.32} = 0.0882 \text{ or } 8.82%This yield compares favorably with many corporate bonds or dividend stocks and carries lower default risk.
Why I Hold It Forever
- Stable tax-free income: Municipal defaults are historically rare.
- CEFs often trade at a discount: I can buy $1 worth of assets for $0.90.
- Leverage amplifies returns: Most muni CEFs use moderate leverage to boost yields without extreme risk.
Investment #2: Business Development Companies (BDCs)
Business Development Companies (BDCs) are another cornerstone in my income portfolio. These companies provide debt and equity financing to small and medium-sized US businesses. In return, they receive high interest payments and equity stakes, which fuel generous distributions to shareholders.
Example: Ares Capital Corporation (ARCC)
ARCC is one of the largest and most stable BDCs in the market. As of the last quarter, it offered a dividend yield of around 9%. Its portfolio consists mostly of senior secured loans, which gives it downside protection in a downturn.
Let’s calculate the annual income from a $100,000 investment:
\text{Annual Income} = \text{Investment Amount} \times \text{Dividend Yield} \text{Annual Income} = 100{,}000 \times 0.09 = 9{,}000That’s $9,000 per year, or $750 per month, in potential income—enough to cover several fixed expenses.
Why I Hold It Forever
- High yield supported by recurring interest income.
- Regulated investment structure requires them to distribute 90%+ of income.
- Management teams with deep credit expertise.
Comparative Table: Municipal Bond CEFs vs. BDCs
| Feature | Municipal Bond CEFs | Business Development Companies |
|---|---|---|
| Typical Yield | 5%-6% (tax-free) | 8%-10% (taxable) |
| Tax Treatment | Tax-exempt (federal) | Fully taxable |
| Risk Profile | Low to moderate | Moderate to high |
| Income Stability | High | Moderate |
| Correlation with Equities | Low | Moderate |
| Liquidity | High | High |
| Volatility | Low | Medium |
Risk Considerations and How I Manage Them
High yields often come with higher risk. However, understanding these risks allows me to mitigate them effectively.
Key Risks:
- Interest rate risk (for CEFs): Rising rates can depress NAV. I diversify maturity dates and monitor leverage.
- Credit risk (for BDCs): Some borrowers may default. I focus on BDCs with senior secured loans and diversified portfolios.
- Liquidity risk: Both investments are exchange-traded but may have wider bid-ask spreads during market stress.
My Risk Management Approach:
- Diversification: I don’t put more than 10% of my portfolio in any single CEF or BDC.
- Reinvestment: I reinvest dividends during downturns to lower my cost basis.
- Due diligence: I read 10-Ks, monitor dividend coverage ratios, and follow credit rating trends.
The Math Behind Sustainable Yield
I use the Gordon Growth Model (Dividend Discount Model) to estimate intrinsic values and ensure yield sustainability:
P = \frac{D}{r - g}Where:
- P is the intrinsic value
- D is the expected dividend
- r is the required rate of return
- g is the growth rate of dividends
If ARCC is expected to maintain a $1.80 dividend, and I demand a 10% return with 2% dividend growth:
P = \frac{1.80}{0.10 - 0.02} = 22.50If the market price is below $22.50, I view it as a buy.
Use Cases: How I Integrate These in My Financial Plan
I allocate about 25% of my long-term income portfolio to high-yield instruments, primarily BDCs and CEFs. This provides:
- Supplemental retirement income.
- Cash flow for reinvestment in growth assets.
- Hedge against inflation if reinvested in growing yields.
Final Thoughts
I believe fat yields can form the backbone of a sustainable income strategy if chosen wisely. Closed-end funds like NVG offer federally tax-exempt income that compounds quietly but effectively. BDCs like ARCC provide robust yields backed by real operating businesses. When combined, they create a dual-engine of income, with municipal CEFs offering stability and BDCs delivering growth-oriented yield.
Rather than chasing short-term trades or speculative growth stocks, I focus on building a fortress of income that I can rely on—year after year. These two fat yields are my go-to options, and I plan to hold them for life.
