FFriday morning, I mentioned to my wife that it was time for us to log into her 401(k) and restock it.
“It’s funny,” she said. “On NPR, they just mentioned that fund managers are moving into cash.”
If that’s not a contrarian confirmation that a short-term bottom could be happening, I don’t know what is!
Besides scary cats chasing money, there is also a misinformation campaign circulating about closed-end funds (CEFs). Since these vehicles are a favorite source of dividends for us over 7%, we’re going to dismantle these lame claims today.
Then we’re going to get into two CEFs that are savvy buys now, as Jay Powell begins to clean up the inflationary mess he created by leaving his cash printer switch stuck on “high.”
Billionaires love these 7%+ payouts (and so do we!)
When I say misinformation, I mean the fact that the media (when not completely ignoring CEFs) tends to portray them as niche investments for billionaires only.
Wrong. Although billionaires invest in CEFs, you and I can buy and sell them in public markets, just like stocks and ETFs.
Speaking of ETFs, let’s stop here for a moment, because comparing ETFs to CEFs is a good way to show why the latter are almost always a better deal for us. Here are four reasons:
- CEFs pay higher dividends: with average yields around 7% today. Compare that to 1.4% for the benchmark SPDR S&P 500 ETF Trust (SPY).
Many CEFs pay monthly, that we love because our payments match our bills. Of the approximately 500 CEFs that exist, 355 pay each month.
You’d be hard pressed to find monthly payers among regular stocks. Aside from CEFs, the only other group of monthly payers are in real estate investment trusts (REITs) like the mall owner Real estate income (O), and even then there are only a handful.
The CEFs are run by professionals: This is essential for today’s markets, where we want our funds to be able to swing in the blink of an eye. And despite common “wisdom,” human managers regularly beat their benchmarks, as we’ll see below.
Active management is especially important in markets that are less “democratic” than stocks, such as corporate bonds, municipal bonds and preferred stocks. Here, well-connected managers get the first call when new issues arise. Algorithmically managed ETFs simply cannot match this advantage.
CEFs offer a discount: This is perhaps the most important point, and the one where many people cling.
CEF bargains come to us via their “rebate on NAV”, which sounds like jargon, but don’t be discouraged. This simply means that because CEFs cannot sell new shares to new investors after their IPO, their number of shares remains largely static throughout their life. This, in turn, means that their market prices are trading at different levels (and often at discounts) to their net asset value, or net asset value, which is just another way of saying what are really worth their wallets. These discounts only exist with CEFs.
Let’s dwell on this last point for a moment, because the last sale gave us the opportunity to buy CEFs with a rare “double discount”.
The first part of that is our aforementioned discount on NAV, which you can easily spot on CEF screeners. Our strategy here is simple: look for CEFs whose rebate “windows” are open wider than usual, then buy…and continue as the window closes, driving the stock price up as it does. .
CEF reductions: Close the window
Of course, we’ll be collecting our rich (and probably monthly) dividends all the time. Also, due to the withdrawal, we have a chance to get a “double discount” on some of these funds. Let’s take a look at two now.
CEF n°1: a perfect 7.9% payer for 2022
The first is the Nuveen Real Assets Income Fund (JRS). It’s earning a seeing 7.9% and fueling that large payout with real estate investment trusts (REITs) whose cash flows are as stable as possible.
These include holdings such as Public storage (PSA) and CubeSmart (CUBE), whose storage lockers are in high demand as people buy more things; deposit REIT Prologis (PLD), which follows the same trend; and data center operator Equinine (EQIX), that benefits from a more distant workforce.
These holdings, with their assets still in demand, are perfect buys in volatile markets, but JRS is trading at 6%. delivery at NAV today. But as you can see in the table below, this reduction is rapidly reducing. And since the fund saw valuations at par before the pandemic, we have a pretty good idea of how this story is likely to end: with more gains driven by discounts!
JRS discount has upward momentum
That’s a lot, considering we’re already seeing strong results from JRS’ savvy management team: they beat both SPY and the benchmark REIT, the Vanguard Real Estate ETF (VNQ), through all the shocks that have occurred over the past year:
When the going gets tough, human managers outperform ETFs
With investors seemingly nervous about everything these days, JRS, with its shrinking discount, strong performance and high and stable dividend, is well worth a look.
CEF #2: A 7.9% payer with a skyrocketing payout
Next, let’s cast our net a little wider with the Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG), a CEF that the members of our sister CEF Insider service will recognize. That’s a 7.9% return that pays monthly and recently increased its payout by 27%!
Most people will tell you that such payout growth is impossible with a high yield investment like this, but ETG is proving them wrong:
ETG’s 7.9% payout refutes naysayers
Source: CEF Connect
The fund offers us broad global diversification, with 34% of the portfolio in Europe and 7% in the Asia-Pacific region. These international games are anchored by stocks here in North America, with dominant American names leading the portfolio, such as Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL) and Coca-Cola (KO), all of which feature in ETG’s top 10 holdings.
This mix generated a total return well above that of the Vanguard Total World Stock ETF (VT) over the past 12 tumultuous months, proving once again the value of professional management:
ETG crushes the ETF, with most of its dividend yield
Put it all together and you have a perfect security + growth setup for these wild markets. And we can look at other benefits of the discount: the ETG is trading at a 3.8% discount today, and it has traded around par many times over the past year.
A Note from the Editor: 5 Monthly Paid CEFs Ready to Buy Now
Kevin Wallen here – I’m the editor here at Contrarian Outlook. I’m stepping in here to tell you that we’ve uncovered 5 CEFs that we urge ALL investors to buy now as rising rates drive markets down.
They are perfect for today’s wild markets because:
- They pay you an outrageous 7.9% dividend between them, the group’s highest payer returning 8.5%. It’s a stream of income you can count on (and it’s a big help in offsetting inflation!).
- They pay you dividends each month–online with your bills!
- These are good deals, which reduces their risk of falling further on a pullback – and sets them up for big gains when the markets (inevitably) rebound.
But a word of warning: We can only invite a few investors to take advantage of this opportunity, and I want you to be among them. Click here and get everything you need to know about these 5 cash-rich CEFs: names, tickers, current yields, discounts and more.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.