Closed-End Funds: Why High-Dividend CEFs Beat Gold as an Inflation Hedge

For decades, gold has held a powerful appeal for investors seeking shelter from inflation and market chaos. Yet this “lousy” conventional wisdom deserves closer examination. When we look at what actually protects wealth during turbulent times, the evidence points elsewhere—specifically toward dividend-paying investments that deliver consistent cash flow.

The Case Against Gold: Data Tells a Different Story

Gold’s reputation as an inflation hedge sounds appealing in theory. But in recent market cycles, it hasn’t delivered. When inflation spikes and volatility surges, gold often fails to provide the protection investors expect. More problematically, there’s an inherent flaw in gold’s appeal for income-focused investors: it generates zero income. Physical gold ownership compounds the problem through storage and insurance costs that eat into returns. This is precisely why dividend investors should look beyond this outdated belief and explore proven alternatives.

The CEF Strategy That Actually Works

Closed-End Funds (CEFs) offer a fundamentally different approach. Unlike gold’s passive nature, CEFs are actively managed portfolios combining stocks, bonds, preferred shares, and real estate investment trusts. They generate substantial, consistent dividends—often paid monthly—while trading at significant discounts to their underlying asset values (NAV).

Here’s where the math becomes compelling: when market prices eventually align with NAV, investors capture returns twice over—once from the appreciation of held assets and again from price recovery toward NAV. With CEFs currently averaging a 4.7% discount across the sector, patient investors can position themselves advantageously.

Three High-Yield CEFs Worth Your Attention

Source Capital Income Fund (SOR): Diversified Global Exposure

SOR delivers a robust 5.7% dividend yield, supported by a decade of 154% portfolio returns. The fund provides domestic diversification through holdings in American International Group (AIG), Comcast (CSCA), and semiconductor producer Broadcom (AVGO), while maintaining international balance through positions like mining operator Glencore plc (GELN), Groupe Bruxelles Lambert (GBLB), and beverage company JDE Peets NV (JDE).

Trading at a 6.8% NAV discount, SOR offers a compounded advantage—you benefit both from the fund’s underlying structure and the temporary market selloff.

Sprott Focus Trust (FUND): Small-Cap Opportunity

With a 6.1% discount and a 9% yield, FUND represents an overlooked opportunity in small-cap equities. The fund’s 140% NAV return over a decade demonstrates its ability to sustain generous distributions even during market stress.

FUND’s portfolio includes consumer staples player Cal-Maine Foods (CALM) and investment manager Federated Hermes (FHI), alongside larger positions like Warren Buffett’s Berkshire Hathaway (BRK.B). This year’s 3% total return contrasts sharply with the S&P 500’s 13% decline, validating the small-cap focused strategy.

General American Investors (GAM): The “Stealth” Yield Champion

GAM stands apart with its creative distribution structure. While the regular quarterly dividend provides solid income, a special December distribution—typically exceeding 6% and estimated at 7.7% this year—delivers the real punch. Combined, this constitutes GAM’s “stealth” 7.7% yield advantage. The 15.8% NAV discount is among the market’s most attractive.

What makes GAM particularly compelling is its fortress balance sheet. With 8.8% of the portfolio in cash (as of April’s close), the fund has positioned itself to deploy capital opportunistically as markets stabilize. GAM’s portfolio reads like a tech-sector who’s who: Microsoft (MSFT), Alphabet (GOOG), Apple (AAPL), Amazon (AMZN), and Republic Services (RSG). Its 12-year track record of 11.9% annualized returns, achieved without crypto or precious metals exposure, underscores disciplined management.

The Income Solution: 7.5% Average Yield

Combining these three funds delivers meaningful diversification—large-cap blue chips, compelling small-cap values, and balanced international exposure—alongside a 7.5% average income stream. Critically, this is a true inflation hedge: regardless of short-term market anxiety, these monthly and special distributions sustain purchasing power through economic cycles.

The Broader Universe: Four Additional High-Yield CEFs

Beyond these three foundations, four additional CEF opportunities yield an 8.5% average return, all paying monthly distributions and trading at even steeper discounts. These holdings provide additional stability during market stress, and their steep valuations set the stage for significant appreciation once equities find footing.

The Bottom Line

Gold’s days as an inflation hedge are behind it. Real inflation protection comes from investments delivering genuine income streams—not from inert commodities. By embracing CEF-based strategies focused on dividend consistency, investors can weather volatility while positioning for recovery gains. This approach beats chasing outdated investment myths that promise safety but deliver nothing.