Friday morning, I mentioned to my wife that it was time for us to log into her 401(k) and move it back into stocks.
“Funny,” she said. “On NPR they just mentioned that money managers are moving into cash.”
If that isn’t a contrarian confirmation that a short-term low may be in, I don’t know what is!
Aside from the scaredy cats running money, there is also a misinformation campaign floating around about closed-end funds (CEFs). Since these vehicles are a favorite source of 7%+ dividends for us, we’re going to bust apart these lame claims today.
Then we’re going to roll into two CEFs that are savvy buys now, as Jay Powell starts cleaning up the inflationary mess he made by leaving the switch on his money printer stuck in “high.”
Billionaires Love These 7%+ Payouts (and We Do, Too!)
When I talk about misinformation, I mean the fact that the media (when it’s not totally ignoring CEFs) tends to portray them as specialty investments only available to billionaires.
Wrong. Although billionaires do invest in CEFs, you and I can buy and sell them on 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 is almost always a better deal for us. Here are four reasons why:
- CEFs pay bigger dividends: with yields averaging around 7% today. Compare that to 1.4% for the go-to benchmark SPDR S&P 500 ETF Trust (SPY).
- Many CEFs pay monthly, which we love because our payouts line up with our bills. Of the 500 or so CEFs out there, 355 pay every month.
You’d be hard pressed to find any monthly payers among regular stocks. Aside from CEFs, the only other pool of monthly payers is in real estate investment trusts (REITs) like mall landlord Realty Income (O), and even then, there are only a handful.
- CEFs are run by pros: That’s critical for today’s markets, where we want our funds to be able to pivot on a dime. And despite the common “wisdom,” human managers regularly beat their benchmarks, as we’ll see below.
Active management is particularly important in markets that are less “democratic” than stocks, such as corporate bonds, municipal bonds and preferred shares. Here, well-connected managers get the first call when new issues come out. Algorithm-run ETFs simply can’t match that advantage.
- CEFs offer a discount: This may be the most important point, and the one where many folks get hung up.
CEFs bargains come our way via their “discount to NAV,” which sounds jargon-y but don’t be put off. It simply means that, because CEFs can’t sell new shares to new investors after their IPO, their share counts remain largely static throughout their lives. This, in turn, means their market prices trade at different levels (and often at discounts) to their net asset value, or NAV, which is just another way of saying what their portfolios are actually worth. These discounts only exist with CEFs.
Let’s hang on that last point for a moment, because the latest selloff has given us an opportunity to buy CEFs at a rare “double discount.”
The first part of that is our aforementioned discount to NAV, which you can easily spot on CEF screeners. Our strategy here is simple: look for CEFs whose discount “windows” are open wider than usual, then buy … and ride along as the window closes, flinging the share price higher as it does.
CEF Discounts: Close the Window
Of course, we’ll be collecting our rich (and likely monthly) dividends the whole time. Plus, because of the pullback, we’ve got a shot at a “double discount” on some of these funds. Let’s take a look at two now.
CEF No. 1: A 7.9% Payer That’s Perfect for 2022
First up is the Nuveen Real Asset Income Fund (JRS). It yields a gaudy 7.9% and powers that hefty payout with real estate investment trusts (REITs) whose cash flows are as steady as they come.
Those include holdings like Public Storage (PSA) and CubeSmart (CUBE), whose storage lockers are in high demand as people buy more stuff; warehouse REIT Prologis (PLD), which is riding the same trend; and data-center operator Equinix (EQIX), which profits from a more remote workforce.
Those holdings, with their always-in-demand assets, are perfect buys in volatile markets, yet JRS trades at a 6% discount to NAV today. But as you can see in the chart below, that discount is narrowing quickly. And since the fund saw par valuations pre-pandemic, we have a pretty good idea of where this story is likely to end: with more discount-driven gains!
JRS’s Discount Has Upward Momentum
That’s a great deal, considering we’re already seeing strong results from JRS’s savvy management team: they’ve beaten both SPY and the REIT benchmark, the Vanguard Real Estate ETF (VNQ), through all the shocks that have come our way over the last year:
When Things Get Rough, Human Managers Outperform ETFs
With investors nervous about seemingly everything these days, JRS, with its narrowing discount, strong performance and high, steady dividend, is well worth a look.
CEF No. 2: A 7.9% Payer With a Soaring Payout
Next let’s cast our net a bit wider with the Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG), a CEF that members of our sister CEF Insider service will recognize. It’s a 7.9% yielder that pays monthly and recently raised its payout a sizzling 27%!
Most folks will tell you that payout growth like that is impossible with a high-yield investment like this, but ETG is proof that they’re wrong:
ETG’s 7.9% Payout Rebuts the Naysayers
Source: CEF Connect
The fund gives us broad global diversification, with 34% of the portfolio in Europe and 7% in the Asia-Pacific region. Those international plays are anchored by stocks here in North America, with dominant US names topping the portfolio, such as Microsoft (MSFT), Alphabet (GOOGL), Amazon.com (AMZN), Apple (AAPL) and Coca-Cola (KO), which all show up in ETG’s top-10 holdings.
This mix has delivered a total return far higher than that of the Vanguard Total World Stock ETF (VT) over the last 12 tumultuous months, again proving the value of professional management:
ETG Crushes the ETF, With Most of Its Return in Dividends
Put it all together and you have a perfect safety + growth setup for these wild markets. And we can look to some more upside from the discount: ETG trades at a 3.8% discount today, and it’s traded around par numerous times in the past year.
A Note from the Publisher: 5 Monthly Paying CEFs Ripe for Buying Now
Kevin Wallen here—I’m the publisher here at Contrarian Outlook. I’m breaking in here to tell you that we’ve uncovered 5 CEFs we urge ALL investors to buy now, as rising rates send the markets into a tailspin.
They’re the perfect for today’s wild markets because:
- They pay you an outsized 7.9% dividend between them, with the highest payer of the bunch yielding an eye-popping 8.5%. That’s an income stream you can rely on (and is a big help for offsetting inflation!).
- They pay you dividends every single month—right in line with your bills!
- They’re bargains, which lowers their risk of falling further in a pullback—and sets them up for big gains when markets (inevitably) bounce again.
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.
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