3 low-cost funds with a yield of up to 8.4%
Historically, for whatever reason, stocks have made most of their gains between November 1 and May 1. (Hence the expression “sell in May and leave.”)
I’m not going to bore you with the statistical details as they don’t matter for our purposes. Each year is unique and we treat each one as such. But, for our contrarian advantage, it helps if the onset of the downturn provokes fear in the hearts of traditional investors.
The S&P 500 acts as if it is about to slide off a cliff. It has been a year since the last significant market correction. We are in the fragile half of the year and, seasonally speaking, September and October tend to be particularly weak.
Heck, just around this time last year the stock market was correcting for the second times in six months. Shouldn’t we be afraid that history will repeat itself?
No, the Fed is supporting us. Of course, stocks are expensive by traditional measures. But the Federal Reserve has printed a ton of money, increasing the existing M2 money supply by more than a third since the start of 2020!
This money floods the capital markets and drives up the prices of stocks and bonds. This is why the S&P 500 stumbles briefly, then rallies quickly and hits new highs in no time.
A high sense of fear shows us that this mini-fix is probably almost over. Which means now is the right time to start rolling out any leftover dry powder in dividend trading. And closed-end funds (CEFs) are a great way to buy that down.
CEFs differ from their mutual fund and exchange-traded fund (ETF) counterparts in several ways, one of which is that the value of CEF shares can (and often does) dissociate themselves from the collective value of their assets. In short, depending on when you are looking to buy, a closed-end fund could allow you to buy its stocks and / or bonds at a price below their value, below their value, or at a premium over their value.
Take into account the current Contrary income report while carrying PIMCO Dynamic Credit and Mortgage (PCI), which has more than doubled in terms of total return since we bought it in 2016. The valuation generated some of those returns: We bought at the time at a juicy double-digit discount to the net asset value, and this discount evaporated to 3% -more premium today.
And that’s what you want to be on the lookout for today.
Here I’ll take a look at three CEFs that are already trading at delicious discounts—and 7 to 8% returns. In theory, you could buy them now and never look back… but a quick panic sell in the coming weeks could make them even more appealing.
Royce Micro-Cap Trust (RMT)
Dividend yield: 7.2%
Reset to net asset value: 11.6%
You might not expect to find significant value in some of the smaller stocks on the market, but this is precisely the goal Chuck Royce has strived for in his 27 years of management. Royce Micro-Cap Trust (RMT).
What exactly does RMT do? Chuck himself explains:
“Our task is to scour the large and diverse universe of micro-cap companies in search of companies that appear to be poorly valued and underestimated, the caveat being that they must also have a margin of safety. discernible. We look for stocks that are trading for less than our estimate of their worth as a company. “
Royce Micro-Cap’s holdings, such as Par Technology (PAR) and Mesa Laboratories (MLAB), averaging just $ 811 million in market capitalization. You’ll be hard pressed to find many fund managers and index traders willing to zoom in on the microscope that far.
And what a legend! Since its inception in December 1993, Chuck has gained 11.3% per year, which is 1.4 percentage points outperforming the Russell 2000, which is a huge advantage over time.
The apparent icing on the cake is an 11.6% discount on the NAV of RMT’s holdings. That’s great, who wouldn’t love to buy a set of handpicked microcaps for around 88 cents on the dollar?
But the historical context is important. Royce Micro-Cap has traded at an average 12% discount from NAV over the past five years, which means the current “sell price” is roughly equal to price.
Virtus AllianzGI Convertible & Income Fund II (NCZ)
Dividend yield: 8.4%
Reset to net asset value: 7.1%
Let’s apply the lesson we just learned from RMT to the Virtus AllianzGI Convertible & Income Fund II (NCZ).
This is an aggressive fixed income game that typically invests about half of its portfolio in U.S. convertible securities with the remainder going into corporate debt, almost all of which is rated junk. Currently, only 7% of the portfolio is investment grade quality issues. More than half of NCZ’s holdings don’t even have a debt rating.
The convertible angle is interesting. The fund’s marketing materials state “Allianz Global Investors seeks to capture the upside potential of equities with potentially less volatility than a pure equity investment. However, in an attempt to amplify returns, NCZ uses significant leverage – 38% at the moment, through preferred stocks. This increases the price returns and yields, but also allows for a more nervous performance.
This volatility means investors are better served by taking advantage of any historically high discount to NAV.
At first glance, NCZ doesn’t seem like a good deal, trading at a mere 7% discount from the value of its assets. But historically speaking, it’s a theft. This Virtus CEF has traded at an average haircut of just 1% over the past half decade.
Kayne Anderson NextGen Energy and Infrastructure (KMF)
Dividend yield: 7.8%
Reset to net asset value: 17.2%
Kayne Anderson NextGen Energy and Infrastructure (KMF) It may sound like a green energy fund full of solar companies and electric vehicle charger manufacturers.
The pitch is even more convincing:
“Investments have been focused on energy companies and ‘NextGen’ infrastructure companies that are significantly participating in or benefiting from the ‘Energy Transition’ megatrend. The energy transition is the global shift to a more sustainable mix of renewable and low-carbon energy sources aimed at reducing emissions of carbon dioxide and other greenhouse gases.
You get a bit of that at farms like Atlantica Sustainable Infrastructure (AY) and Brookfield Renewable Corporation (BEPC). But KMF actually shares a lot in common with its sister fund, the Kayne Anderson MLP Investment Fund (KYN)– namely, it is full of major oil and natural gas (MLP) limited partnerships and other traditional high-yield energy companies.
No problem with that. In theory, a mix of companies that also includes Enterprise Product Partners
In practice, however …
A healthy 22% debt leverage in an industry with years of problems amplified the energy losses. This means that if you are interested in playing a comeback you should do so when the price of KMF is ideal.
It’s arguably a deal right now, with a massive 17% discount that compares well to its five-year average of 13.6%.
Brett Owens is Chief Investment Strategist for Contrary perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.