This Fund’s “Secret” 9% Dividend Will Shock Investors
One of the best things about closed-end fund (CEF) investing is the terrific “bonus” discounts CEFs give us on stocks and other investments.
Here’s what I mean by a bonus discount: CEFs often trade at a level far different—and cheaper—than their net asset value (NAV), or the market price of a fund’s portfolio holdings.
And these discounts aren’t peanuts: you can easily snag CEFs trading at, say, $1.00 per share when their “real” value is $1.10 share—or more.
Right now, there are 3 low-risk, highly diversified funds trading at a near 20% discount to their NAVs (17.6%, on average). All 3 boast dividend yields far higher than the average S&P 500 stock, with one set to pay us up to 9% in cash, in the form of a special dividend.
That’s a deal any value investor should jump at. As Warren Buffett said, the best investors buy “phenomenal businesses at discounted prices.” The only problem, of course, is that those discounts are hard to find! Yet these 3 funds are serving them up on a silver platter.
Before we get into why these 3 funds are so cheap, let’s talk about why this sale is happening in the first place.
A Scared Market
The stock market is weird right now.
Stocks should be skyrocketing, if you just focus on fundamentals; so far in the first quarter, earnings are up 24% from a year ago—a meteoric increase that’s far ahead of the already lofty expectations analysts had put out before earnings season began. But even so, the market is flat on the year.
Mr. Market Takes a Nap
There are many reasons why the S&P 500 isn’t rising, but none have to do with the crucial facts: wages are up, consumer spending is surging, jobless claims are falling and profits are exploding. Since all this strength is hitting the markets and prices are still flatlining, the S&P 500’s forward P/E ratio is plummeting:
A Quick Pivot From Pricey to Cheap
What does this tell us?
Mainly that the market is discounting companies despite their phenomenal results. And when we go a step further, into the CEF world, those discounts get magnified by a huge opportunity CEFs provide: something I call “amplified terror.”
The “Amplified Terror” of CEFs
“Amplified terror” is a term I use to describe the behavior of CEF buyers broadly. When the market is fearful, CEF investors tend to be extra fearful—and any moment of caution in the markets tends to be amplified in CEFs.
Before I explain why, let me detail exactly what I’m talking about. If we look at the CEF Insider Equity Sub-Index, we see that it has fallen a bit below 2% in 2018:
CEFs Amplify the Fear
Remember that equities are flat year to date, which means CEFs are doing a bit worse.
This is our opportunity.
The reason why is simple: when the market gets afraid, CEF investors get terrified—and the opposite is also true. When the market gets greedy, CEF investors get extremely greedy—which means CEFs can go up a lot faster than stocks in good times. For a patient CEF investor, these downturns are opportunities to get bargains, and the best part is that CEFs offer high yields—so you’re getting paid while you wait for the market to wise up.
And as I mentioned off the top, there are 3 funds offering this opportunity in spades.
A 3-Buy Discount “Swing Play”
To play against stock market fears and CEF terror, there are 3 funds you should consider now: Dividend and Income Fund (DNI), GDL Fund (GDL) and General American Investors (GAM).
I am spotlighting these 3 funds in particular because of their unusually massive discounts to NAV and their conservative market approach—a best-of-both-worlds opportunity for investors who want maximum return with minimal risk.
Underpriced Equity Funds Are a Rare Bargain
While DNI sports the biggest discount out there now, GDL and GAM make the top-10 list, as well—and each pays a nice dividend. While DNI and GDL pay around 4.5%, on average, GAM pays a special dividend at the end of the year that varies a lot. Last year it was 12%, and I expect it to be above 9% this year for investors who hold through December. That makes for a compelling income stream just by holding these 3 funds.
But that’s not the main reason I like these funds now. With their massive discounts, they are poised for major short-term capital gains.
How do I know? Because this has happened before.
A Snapshot of History
When the market panicked in early 2016, these 3 funds saw their discounts widen due to the amplified terror of CEFs—creating a rare buying opportunity.
These 3 funds then exploded by the end of 2016, creating double-digit gains, thanks to the stock market’s irrational fears and the even more irrational fears of CEF investors. Since 2016 was a year a lot like 2018—starting off weak despite tremendous earnings growth—there’s good reason to expect history to repeat very soon.
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Robust dividend growth separates the winners from the losers.
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Category: Closed-End Funds (CEFs)
