Discounted Closed-ends with delicious Yields
Finding income from all the right places today requires a wider net than ever before. One sector often overlooked by individual investors is closed- end funds (CEFS). Such funds normally trade at an average discount of about –7% to their net asset value (NAV), but these baskets of tradable securities never fully recovered from the September market drop. Discounts are now as high as 18%.
There are a couple of reasons for this divergence from NAV other than underlying fundamentals. First, closed- end funds have no natural audience of investors and few analysts opining on their performance or outlook. Hence their recovery from a market- driven correction will be slower, since they are on fewer radar screens.
A second reason, I suspect, is that CEFS tend to be held by individuals, and many sold in September for tax reasons. Their idea is to buy the shares back after 30 days to avoid running afoul of the wash sale rules. Others are waiting for the December quarterly exdividend date to pass. Since such distributions come out of NAV, the thinking is that the price will drop by the amount of the distribution. In my experience this price decline seldom occurs.
What makes CEFS particularly attractive this year is that the end dividends typically feature a mix of earned and accrued interest, dividends, option trading gains and earned capital gains. When a fund runs through all these, it can choose to sustain its dividend payout rate through a distribution paid in capital. When that happens, you want to head for the exit.
Here are a few of my favorite closed- end funds. For preferred stock CEFS I like
which yields 8.54% with a price variance of –10% from NAV versus a normal –7.9% discount. The fund is chock-full of the preferreds of big banks, insurance companies and utilities, and the price here should react to a Fed rate bump, possibly making them an even better buy. For industrial CEFS look at
yielding 11.6% with an NAV discount of –15.2% versus a normal –11.4%. Voya’s holdings are a treasure trove of multinational blue- chip stocks, including General Dynamics, Siemens AG, Lockheed, General Electric and BHP Billiton. For an infrastructure play I like
yielding 8.43% with an NAV discount of –15.7% versus a normal –14.1%. The fund, which has $2.8 billion in assets, is heavily weighted in regulated and integrated utilities, among them PG&E Corp., Nextera Energy, CMS Energy and the U.K.’S National Grid Plc.
Finally, for a fund investing in midstream MLPS look at
yielding a whopping 16.57% with a price discount of –8.8% versus a normal premium of 8.1%. MLPS such as Kayne, which holds big-pipeline MLPS in its portfolio like Kinder Morgan, Plains All American and Enterprise Products Partners, are some of the most underpriced buys in the market because of oil’s woes.