Closed-end funds that pays out a reliable stream of income can help in the planning for retirement, explains Rida Morwa; in this special 5-part report, the editor High Dividend Opportunities highlights his favorite ideas for retirees and other income investors.
Cohen & Steers Quality Income Realty Fund (RQI) has approximately 200 holdings with 13% exposure to housing (apartments, single-family homes, and manufactured housing). REITs that concentrate on infrastructure make up another 12% of their holdings.
Click here to read The Best Closed-End Income Funds, Part 1: Municipal Bonds
RQI has a 8% exposure to corporate bonds and 8% exposure to preferred shares to add some additional ballast to the portfolio. Malls and shopping centers combine for less than 5% of the portfolio. Leverage is currently at a modest 25% level.
RQI invests in real estate and its top holdings are all equity REITs. REITs make money by owning real estate that they then rent out to tenants. This is a fairly stable income stream because people and businesses tend to pay their rent even in the hardest of times.
When circumstances force them to get behind on some of their expenses, rent is usually the last to get missed. On top of that, real estate and rent are two inflation-protected quantities.
In fact, rent has significant weight in determining inflation. Looking at the latest inflation report, rent (for consumers) saw a 5.5% increase from last year. That is a big bump from last month and shows that rent is now beginning to show the impact of inflation.
Remember, rents typically increase only once a year, so this bump from last month represents only about 10% of rents being increased. For commercial properties, leases typically have year-over-year rent escalators built into the length of the lease. Many REITs use escalators tied to inflation, so those will be boosting rent payments in the coming months.
RQI has not cut the distribution over the last 10 years. Instead, it has had several distribution increases, with the most recent increase in 2015. In October of 2016, RQI switched from a quarterly distribution of 24 cents to a monthly distribution of 8 cents, keeping the same annual total distribution.
Despite a general market decline, RQI's NAV is still above where it was before the COVID pandemic hit. NAV has generally been increasing over the years, so the small amounts of ROC in the distribution have not been destructive. This year, the distributions have been covered 40/60 by a mix of short- and long-term capital gains.
Typically, NII makes up a bigger portion of the distribution in the second half of the year. RQI navigated the last recession with only a short-lived reduction in the distribution, so the current distribution looks reasonably safe.
With a yield of 6.6% and the share price being down almost 20% so far this year, now looks to be an excellent entry point as RQI is trading at a discount. Disregard the warnings of economic calamity and take advantage of the insane income opportunities all over the market.
