3 Cheap CEFs Yielding Up To 8.4%
Contrarian Outlook | Jul 15, 2021 05:08AM ET
As I write this, the 14 funds in our CEF Insider portfolio yield a tidy 6.7%, on average. And while that’s down from the 7.5% average (and above) we’ve seen in the past, there’s a good reason: big price gains! (Because prices and yields move in opposite directions, of course.)
And recently, we’ve locked in some of those big returns with timely sales. In our June 2021 CEF Insider issue, for example, we sold the Prudential Short Duration High Yield Closed Fund (NYSE:ISD), which we bought in late 2019 (a lifetime ago!) when it was trading at a 10.3% discount to net asset value (NAV).
That handed us a nice 25% gain, as well as an 8.5% yield on our original buy. We’ll happily take that return on a bond fund, especially when much of our profit has come to us as dividends.
h2 ISD Soars on a Bond BounceWhile we love strong, steady gains like this, selling means we need to roll our cash into new dividend payers. And while we have many high-yield options to choose from in our CEF Insider portfolio (even in an overheated market like this one), I also know that some of our readers like to pick up dividend-payers outside our official holdings with money they may have available for riskier CEFs.
With that in mind, I’ve got three CEFs for you to consider as “outside the line” options today, yielding 8% on average. None of these three are CEF Insider portfolio recommendations, and I see all three as speculative plays. But they do offer high yields, and they also trade below the value of the stocks and bonds they hold.
h2 1. A 7.8%-Paying Bond Fund With an Eye for Value/h2First up is the Western Asset Emerging Markets Debt (NYSE:EMD), a name that members of our sister Contrarian Income Report service will recognize. EMD has just under a billion dollars of assets in its portfolio, putting it on the smaller side of CEFs.
The nice part is that, despite its smaller size, EMD benefits from the expertise and resources of its management firm, Legg Mason (NYSE:LM), which has $731 billion in assets. And as you can probably guess from the name, EMD invests in debts from emerging markets.
Source: Legg Mason
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EMD’s portfolio spans the globe, with bonds from Latin America, Southeast Asia and the Middle East, all of which have seen faster growth than in developed nations. We’ve also got a nice play on vaccine timing here: with EMD, you can buy into these markets now, just before they’ve recovered from the pandemic. That’s a savvy move at a time when investors have overbought many assets in the more vaccinated west.
h2 Long-Term GainsEMD has a long history of steady profits, yet its 5.7% discount to NAV exists because investors have flocked to markets with more vaccine access. But there’s just too much demand to get the rest of the world vaccinated and fully open, meaning emerging markets will see a flood of investment. Buying EMD now lets you front-run that move, and you get a 7.8% dividend, too.
h2 2. A Domestic Bond Fund With an 8.4% Payout/h2For a more domestic focus, consider the AllianzGI Convertible & Income II Closed Fund (NYSE:NCZ), which trades at a 6.6% discount to NAV. NCZ’s biggest holdings are in Broadcom (NASDAQ:AVGO) bonds, Bank of America (NYSE:BAC) preferred shares and debts issued by Tesla (NASDAQ:TSLA), Ford(NYSE:F) and Square (NYSE:SQ), all three of which are positioned to cash in on America’s reopening.
h2 Long-Term Profits Getting BetterNCZ is out of the COVID-19 woods and back to delivering strong profits. And note how it has also survived the subprime-mortgage crisis, rising rates from the Fed, and the pandemic. This is a fund that’s battle-tested, and it yields 8.4%, too.
h2 3. A Short-Term Play on the Energy Boom/h2If you’re looking to tap into surging oil and gas stocks but fear you’re too late to the party, fear not. An energy CEF run by one of the best managers in the sector is still available at a discount.
I rarely recommend energy CEFs due to their more-volatile nature. But if you do want to invest, my go-to is the Kayne Anderson MLP Investment Closed Fund (NYSE:KYN), an 8.4%-yielder that’s also a pick of our Dividend Swing Trader service, which focuses on short-term trades in dividend-paying stocks and funds.
h2 Soaring Past Crisis to ProfitDespite its strong run, KYN trades at an 8.2% discount right now. That’s a rarity, since this fund averages a 3% premium to its NAV over the long haul.
KYN mainly holds master limited partnerships (MLPs), which operate oil and gas storage facilities and pipelines. These are nice plays on energy consumption because they charge a fee for each barrel shipped. Many folks avoid MLPs because they send you a complicated K-1 form to declare your dividends at tax time. But buying through KYN gets you around this: you’ll get a simple form 1099 instead.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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