3 cheap funds yielding 9%+ to buy in this market bounce
If you’re like me, you regularly hear from friends who brag about having successfully timed the market in the past. What these people are going never tell you, it’s the number of times they missed the mark!
Take last week, when millions of people were parked on the sidelines, terrified (thanks to alarmist media reports) that July’s CPI index would be worse than expected, triggering a sell-off.
Of course, we now know that the exact opposite happened – and I guess you won’t hear from your friends who failed to grasp this bounce!
Listen, when other people manage to pull off this trick, I salute them. It always feels good to win a bet. But to be fair, the odds of successfully timing the market are like a coin toss (at best).
We prefer to outperform all the time, only on dividends
When it comes to investing for the long term, we dividend contrarian investors take a different approach. Has my CEF Insider service—which is dedicated to high performance closed-end fund (CEF)— we like to hold onto our CEFs, many of which yield 7% or more and pay monthly, both up and down in the markets. (I’ll reveal three such funds, yielding up to 9.2% and trading at bargain prices, below.)
If you’ve taken a look at historical stock market returns over the long term, you’ll know that they average around 7%, in dividends and price gains, depending on the time period you’re looking at. With our CEFs, we match, if not beat, that number in dividends alone.
However, CEFs are not limited to dividends. These funds have a built-in indicator of their own called “net asset value discount” or “net asset value discount” for short. It tells us exactly when a CEF is cheap and when it is expensive.
Here’s how it works and how you can use it to add some nice upside bonuses, on top of the “natural” earnings (and high dividends) you’d get from CEFs on their own.
The discount agreement
The discount to net asset value stems from the fact that since CEFs have more or less the same number of shares throughout their life, their price is often different on the open market from the value of all the shares they have. ‘They hold. And very often they negotiate at a discount – deep discounts on top of that.
Stick with me here, because paying close attention to discounting NAV can unlock some serious gains in CEFs, for several reasons.
The first, of course, is that you get a deal: CEF trading at a 10% discount to NAV means you’re essentially paying 90 cents on the dollar for stocks, bonds, REITs, or whatever. that the fund holds. This alone attracts new investors, which drives the price up.
The second, and related, benefit is the ability to take advantage of a discount as it shrinks and (hopefully) turns into a premium. When this happens, it acts as an afterburn on the market price of a CEF.
How a closing CEF rebate generated a quick 145% gain
To see the dramatic effect a fence shed can have, consider the BlackRock Science and Technology Trust (BST), which focuses on big tech stocks like Microsoft (MSFT), Apple (AAPL) and Mastercard (MA). In just over two years, BST’s steep discount rose to an 8.6% premium as the stock market gained ground and income-seeking investors took note of the fund’s payout, which yielded around 6% at the time.
The result was a massive ‘bonus’ gain on top of the natural increase in BST’s portfolio.
This extra gain is exactly what can happen when you buy a discounted CEF!
And these days, there are still plenty of heavily discounted CEFs out there, even though the market is bouncing back from its recent lows. Let’s look at three, which offer discounts as low as 16.2% and yields of up to 9.2%.
CEF Pick #1: 9.2% Oil & Gas Dividend with “Rebate-Driven” Rise
The first is the Kayne Anderson NextGen Energy & Infrastructure Fund (KMF), a 7.5% return trading at that huge 16.2% discount I just mentioned. As large as this discount is, it is already starting to decline (it was 20% recently) and the fund is posting strong total returns, both on a market price basis and on an NAV basis.
This is not surprising given the (still) tight oil markets and the fact that the fund specializes in Master Limited Partnerships (MLPs), high-yield companies that primarily operate oil and gas pipelines and storage facilities. .
The thing to keep in mind with KMF is that the above gain occurred despite the fact that the fund’s discount remains unusually large: it is well above the 3.8% average discount among CEFs in general. But that is changing rapidly and will likely continue in the long term, as oil supplies remain tight.
CEF Pick No. 2: Blue chip stocks return 5.8% (and sell for 89 cents on the dollar)
Another compelling cheap fund is the 5.8% yield Gabelli Dividend and Income Fund (GDV), which has rebounded nicely from the market bottom in June, both on a NAV and market price basis. It looks set to go even higher, thanks to its steep 11% discount.
GDV has done well in the recent rally, driven by high cash flow holdings like Alphabet (GOOG), Swedish Match (SWMA), American Express (AXP), Mastercard (MA) and Microsoft (MSFT).
The fund, which is led by value investing legend Mario Gabelli, began to see more investors buying, while the fundamental value of its portfolio also rose by around 10%. In the meantime, its discount hasn’t closed much, so we can expect more upside as investors take note of the offer here and buy.
CEF #3: A Tremendous Bargain in Real Estate (9.2% Yield)
The last fund to consider is the Main Property Income Fund (PGZ), which has another big discount, at 9.5%, and also an amazing yield, at 9.2%. Big discounts like these tend to disappear quickly in rising stock markets, and PGZ is a good example.
In 2017, the fund, which invests primarily in home loans and mortgages, saw huge demand as the property market strengthened. As a result, the PGZ discount has dropped significantly.
This, of course, translated into big profits for shareholders over the same period, as the fund’s net asset value and market price took off.
And we are already seeing a retelling of this story in 2022.
Even so, PGZ’s discount still hovers around 10%, suggesting the possibility of double-digit capital gains as it fades, in addition to the benefits of the market rally for contrarians looking to escape. other side of these rate hikes, to an (inevitably) recovery in the real estate market. And you’ll get a 9.2% dividend while you wait.
Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 8.4%.”