3 Out of 152 Closed-End Funds Yielding 7%+ To Consider (And They’re Cheap Now)
Contrarian Outlook | Sep 13, 2021 05:05AM ET
What if I told you there are 152 funds out there that yield 7%+? And many of these stout income plays are even safer than the typical S&P 500 stock! They hold the household-name stocks we all know, as well as high-quality corporate bonds, senior loans, real estate investment trusts (REITs)—just about any asset class you can think of.
I’m guessing you’d be interested, especially with the S&P 500 dribbling out a pathetic 1.3% yield these days, and 10-year Treasuries paying 1.35% (and handcuffing our cash for 10 years in return!).
So today we’re going to dive into these 152 income juggernauts and tease out three of the best ones (average yield: 7.4%) for you to consider now.
Before we do, though, I should tell you that the potent 7%+ income plays I’m talking about are closed-end funds (CEFs), an asset class that’s way too often overlooked. But this obscurity works in our favor because it makes the CEF market even more inefficient than the stock market, setting us up for mis-pricings we can ride to serious gains, on top of our 7%+ dividends.
Better still, CEFs often trade at discounts to the value of their portfolios (this metric is called the discount to net asset value, or NAV). This is a quirk of the CEF structure and a clear indicator of value—one that ETFs like the wildly popular SPDR® S&P 500 (NYSE:SPY) never give us. They always trade at par (give or take 0.1%)!
h2 Big-Name ETF Is Never A Bargain/h2These deals exist despite the fact that CEFs boast sky-high yields, with an average payout of 6.2% across all 500 or so of these funds. And as I said above, 152 CEFs pay out more than 7%!
Of course, just because a fund boasts a big dividend yield doesn’t mean it’s a worthwhile investment, which is where the three CEFs we’ll dive into now come in. In addition to their 7%+ dividends, they boast discounts that prime us for continued upside while helping cushion our nest egg in a downturn.
h2 1. Ares Dynamic Credit Allocation Fund /h2Let’s start with a high-yield, low-risk fund that puts us at the top—literally. Ares Dynamic Credit Allocation Fund (NYSE:ARDC) holds $547 million worth of senior loans and yields an impressive 7.2%. Better still, this tightly run fund trades at a 2.6% discount to NAV, so we’re getting its assets for a bit less than they’re really worth. And its discount has been shrinking, meaning it’s coming close to trading at a premium, at which time we can make some quick profits.
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That’s an intriguing opportunity, but it’s not the only reason to look at ARDC. Another is its portfolio, which is built to withstand a downturn. Its senior loans are at the top of the pile to get repaid if a company runs into trouble. In addition, ARDC is broadly diversified: its portfolio holds 252 investments, so any trouble with one would barely affect your return. This level of stability makes ARDC an oasis in light of the Delta variant’s potential to hinder economic growth.
A Rising Star
With a whopping 40% in total returns over the past year, ARDC has proven it deserves to trade at a premium price, and the market is slowly realizing this. That makes now a great time to pounce on this fund, before that happens.
h2 2. Nuveen Tax-Advantaged Dividend-Growth Fund/h2Nuveen Tax-Advantaged Dividend Growth Closed Fund's (NYSE:JTD) strategy is simple: it snaps up companies with strong cash flows that keep their dividends growing, no matter where they are in the world. Its top holdings are Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL),Dutch life-sciences firm Koninklijke DSM (OTC:RDSMY) and Danish pharmaceutical maker Novo Nordisk (NYSE:NVO)—all firms with strong histories of dividend growth.
While you could buy all these companies on your own, JTD makes it easier to buy them all at once, and it also gives them to you at a bargain, thanks to its 7.8% discount to NAV.
What’s more, JTD’s 7.1% dividend yield is far greater than what any of these companies pay on their own, and its management is adept at rotating in and out of these firms as they get over- or undervalued and doing so to minimize your tax burden (hence the name of the fund).
Years of Payouts Banked
Finally, in the last year, JTD has earned five years’ worth of payouts, meaning this dividend is as secure as it’s ever been.
h2 3. Voya Global Equity Dividend & Premium Opportunities Fund/h2Voya Global Equity Dividend & Premium Opportunity Closed Fund (NYSE:IGD) gives you as much geographical diversification as you can get in one fund, with assets spread across the globe.
Unlike other foreign funds, IGD has a healthy mix of American companies in its portfolio, but with a focus on US firms that benefit from global growth. That’s a smart strategy that gets you the security and rule of law we benefit from in America, combined with the fast profits often available in emerging markets.
So it makes sense that Johnson & Johnson (NYSE:JNJ)is IGD’s biggest holding, followed by Pfizer (NYSE:PFE), Cisco Systems (NASDAQ:CSCO)and Merck & Company (NYSE:MRK)—all US firms that are deeply entrenched in countries around the world.
Source: Voya Investment Management
We like IGD’s geographical spread because it includes assets in nations where value is easily overlooked (Japan and Canada, for example). Meantime, economies like those of Germany—the strongest in the EU—Australia and Switzerland provide growth opportunities. The result has been a strong total return over the past year, with a big slice of that gain in cash, thanks to IGD’s dividend, which yields 7.8% today.
IGD Soars—With a Big Slice of Its Gain in Cash
Combine IGD with ARDC and JTD and you’ve got a well-diversified and sophisticated portfolio that’s yielding 7.4% while giving you strong diversification across regions and asset classes. The kicker is that you’re also getting these funds at a discount, which is almost unheard of in today’s overbought market.
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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