Our Recession Defense Plan: Giant Monthly Dividends

Although some tariff hikes have been paused, a recession is still very much in play.

Just a few days ago, I wrote that “this is the time to recession-proof our retirement holdings.” And why not? GDP estimates have tanked. So has consumer sentiment.

Goldman Sachs made headlines for raising its probability of recession (from 20% to 35%). Fine, but equity analysts often get caught up in crowds.

What was more striking was hearing a similar message from the debt watchers. Consider this post from Mark Zandi, Moody’s Analytics’ chief economist:

In my previous post, I showed readers how to recession-proof their portfolio with municipal debt. But tax-advantaged munis aren’t the only way to hunker down for the worst.

A variety of debt would benefit if Treasury Secretary Scott Bessent’s campaign to flatten long rates is successful. And we can get the most bang for our buck via closed-end funds (CEFs), which not only deliver much more yield—like the 8.9%-10.7% paydays I’ll highlight today—than comparable exchange-traded funds (ETFs), but can trade at a discount to their net asset value (NAV), meaning we can buy those bonds for less than they’re actually worth.

For instance:

3 Monthly Dividends That Could Thrive In a Recession

Western Asset Inflation-Linked Opportunities & Income Fund (WIW)
Distribution Rate: 8.9%

The Western Asset Inflation-Linked Opportunities & Income Fund (WIW) is an intriguing play if only because the current situation is so unique.

The majority of WIW’s holdings (80%+) are inflation-linked securities, largely Treasury Inflation-Protected Securities (TIPS). The rest of its assets are sprinkled around investment-grade corporates, emerging-market bonds, non-agency mortgage-backed securities (MBSs) and other debt. The resulting portfolio is extremely high in credit quality.

The play here seems contradictory at first.

Trump’s tariffs, if they hold, are widely expected to juice inflation, for obvious reasons. Research houses have been raising their CPI and PCE estimates left and right over the past few days.

But if inflation gets out of control, the Federal Reserve would swoop in and hike rates to try to quell rising prices like it has in the past, right? And if so, wouldn’t that keep bonds grounded?

Possibly. But between federal-government purges and the potential for a lot of short-term tariff pain here at home, unemployment estimates are also going up. And while higher joblessness would weigh on inflation somewhat, it could also stay the Fed’s hand and put downward pressure on long-term rates.

In short: Stagflation (high inflation + slow economic growth) is actually a win-win situation for TIPS, and thus a win-win for WIW.

And we can expect to get more out of WIW than a plain-vanilla ETF in a TIPS-friendly environment.
That’s largely because of 30% debt leverage, which is an elevated amount that lets management go full-throttle on its highest-conviction picks. That same leverage is how WIW gets 9% monthly dividends out of such highly rated holdings.

Western Asset’s fund trades at an 11% discount to its net asset value (NAV), so we’re getting its holdings for 89 cents on the dollar. That’s good—it would be great, but WIW has averaged a 12% discount over the past five years.

Nuveen Preferred & Income Opportunities Fund (JPC)
Distribution Rate: 10.7%

Few debt CEFs will get anywhere close to WIW’s portfolio quality, but we shouldn’t look down our noses at Nuveen Preferred & Income Opportunities Fund (JPC), which also manages to squeeze a stellar yield out of a sterling portfolio.

As the name would suggest, Nuveen’s CEF is a preferred-stock fund. Preferreds technically aren’t debt, but they share a lot of the same characteristics. So they’re bond proxies, and they too can thrive should we get lower long-term rates.

JPC specifically holds roughly 280 preferreds with a heavy overseas bent—currently, the portfolio is split 55/45 domestic/international. But the companies behind the preferreds are exactly what we’d expect from a preferred fund: Financial firms such as Barclays (BCS), JPMorgan Chase (JPM), and Wells Fargo (WFC) make up the lion’s share of assets.

Credit quality is also much better than other funds in JPC’s category.

With JPC, we’re getting both the benefit of human managers (who can target underpriced opportunities) and an even loftier amount of leverage, at 39%. The result is, like WIW, a juiced-up version of a plain-vanilla index ETF:

But look at that nasty dip at the far right. That’s worse than a lot of bond funds, in part because preferred stocks—while “preferred” compared to common equity—aren’t as secure as true debt. Extreme fright in the equity markets can weigh on preferreds, too, which makes timing all the more important.

Right now, JPC is trading at a roughly 2% discount to NAV versus a five-year average of 5%. We’re getting a bargain on this double-digit monthly dividend, and we could be suffering additional short-term headaches, too.

BlackRock Credit Allocation Income Trust (BTZ)
Distribution Rate: 10.1%

I highlighted a BlackRock muni fund a few days ago, but it’s not the only BlackRock product that’s worth a look in this environment.

The BlackRock Credit Allocation Income Trust (BTZ) is a multisector bond fund whose managers have a true “go anywhere” mentality. Right now, shares of BTZ give us exposure to investment-grade corporates (40%), junk (35%), developed sovereigns (17%), securitized products (11%), small amounts of bank loans and emerging-market debt, even a trace of equity.

The sizable chunk of high-yield debt means credit isn’t stellar—in fact, on average (BBB-), it’s about a step lower than the average multisector bond fund’s credit (BBB).

We get the same combination of opportunistic management and high (35%) leverage as we do with the other funds. The downswings are still violent, but the outperformance is massive.

In other words, while we still want to buy at ideal prices, the pressure isn’t as great for us to jump into BTZ at exactly the right moment.

A 8% discount to NAV versus a 6% five-year average is nothing to sneeze at.

Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever.

Disclosure: none