2 CEFs To Save You In Choppy Markets, With 7.9% Yields And Upside

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."

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 (NYSE: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 (NYSE: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.

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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.

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.

First up is the Nuveen Real Estate Fund (NYSE: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 (NYSE:PSA) and CubeSmart (NYSE:CUBE), whose storage lockers are in high demand as people buy more stuff; warehouse REIT Prologis (NYSE:PLD), which is riding the same trend; and data-center operator Equinix (NASDAQ: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!