This stock market liquidation has disappeared path too far – and it has inflated the dividend yields of some of our favorite high-yield closed-end funds (CEFs).
It means it’s time to buy. I will name three CEFs that the panicked masses mistakenly threw overboard in an instant. Together, these three snubbed funds get rid of an average dividend of 8.7%. Plus, they trade at a nice “double discount”: that is, CEFs themselves are cheap, and their holdings, which consist of top-tier US and international stocks, are also heavily discounted. oversold in this latest market crash.
History is on our side
When considering opportunities like this, it helps to look at history. And the closest recent parallel we have is the period from December 17, 2015 to December 20, 2019, when the Federal Reserve raised rates from 0.5% to 2.5%, much more than expected this time around.
How did the CEFs do it? How are you.
The S&P 500 also performed well during this period, returning 70% (although we much prefer CEFs, not only because of their track record of outperformance, but also for their high dividends: many CEFs yield north of 7% today, versus a paltry 1.25% for the S&P 500,).
Still, the Chicken Littles are leading the markets right now, which is why stocks are down around 4% in the first few weeks of 2022. That, added to the story we just covered, points to an opportune moment to buy.
High Yield CEF #1: A 7.7% Dividend That Is About To Become A Darling Investor
We will start with the yield of 7.7% BlackRock Health Sciences Trust II (BMEZ), which is trading at a 5.7% discount to net asset value (NAV, or the value of the shares in its portfolio) at the time of this writing.
This fund focuses on innovative biotech companies with strong growth prospects. His holdings include Seagen (SGEN), which focuses on new cancer treatments; Intuitive surgery
The healthcare sector qualifies for our ‘double discount’ as it has been left behind by the market over the past year, based on benchmark performance SPDR Selected Healthcare Sector ETF (XLV)
BMEZ is also discounted as it’s new, having launched in early 2020. But so far things look good – it’s been a close match to XLV since its inception, so buying it gives you the performance of the index fund, plus much more of your cash return, thanks to CEF’s strong 7.7% dividend.
And finally, you get increased upside potential as BMEZ’s 5.7% net asset value discount narrows (those discounts don’t exist with ETFs, which always trade at par).
High Yield CEF No. 2: A small-cap star with a 10.5% payout against inflation
We then turn to the Royce Micro-Cap Trust (RMT)a 10.5% return with a 10% discount to NAV and a variety of smaller companies that the market has overlooked or just isn’t aware of, like Mesa Laboratories (MLAB), a provider of diagnostic and environmental equipment and services to a range of industries, from pharmaceuticals to food and beverage; Canadian contract driller Major drilling; and IT manager BY Technology Corp. (THROUGH).
Royce has a long history of finding high quality stocks that the rest of the market either doesn’t understand or has completely ignored.
High Yield CEF No. 3: Global diversification and a payout of 7.8%, too
With RMT’s value-priced micro-cap stocks and BMEZ’s healthcare stocks, we are already well-diversified and well-positioned to take advantage of a post-pandemic sell-off. But let’s add it Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG), with its dividend yield of 7.8%, to mix.
Although the fund’s 1.3% discount is not as large as those of RVT and BMEZ, it traded at a premium as recently as July last year and tends to trade for more. than the value of its portfolio on an upswing, which means that there is an advantage to be acquired, although the fund’s narrower discount could increase its volatility in the short term.
Over the long term, however, EXG’s track record and portfolio are compelling.
The management team began by anchoring its holdings in the biggest stocks of the S&P 500, including Microsoft
Inflation doesn’t stand a chance against these low-priced 8.7% payers
With these three funds, you get an average dividend yield of 8.7% and a highly diversified portfolio, while paying less than the real market price for all these big companies. It’s a savvy way to take advantage of the latest Wall Street panic.
Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 7.5%.”