This is the promise which comes our way from the folks at Contrarian Outlook:
“I’ve found a proven way for you to bag double-digit price gains – year in and year out – in your income portfolio.
“And you won’t have to sacrifice a single cent of dividend income to do it. In fact, you’ll be pocketing payouts 5 times greater than what the average S&P 500 investor is forced to take today.
“I’m talking SAFE 7.4% dividend payouts (and in many cases higher than that).”
I know that kind of idea is catnip to the whiskers of those of you out there in Gumshoedom who are looking at living off of your portfolios, or pocketing cash returns instead of hoping for capital gains windfalls, so let’s dig in and see what they’re pitching.
The ad letter comes from Michael Foster, and the subscription they’re selling is to the CEF Insider ($399 for the first year, 60-day refund period), where he’s the Investment Strategist. This is one of the few services that focuses on closed-end funds… so what they’re talking about, of course, is investing in closed-end funds (CEFs), which are a mostly income-focused backwater in the investment industry… more from the ad:
“CEFs routinely hand investors safe 6% to 12% dividend yields and FAST double-digit gains, too!
“And since they get so little attention from journalists and the suits on Wall Street, we can pick up these income wonders at spectacular discounts, as I’ll show you in a moment.
“So if you’re at or near retirement – or just looking to grab some extra cash to pay the bills or bulk up your savings, these unsung funds are EXACTLY what you’re looking for.”
That’s true, though you can sacrifice some returns by focusing on an income-obsessed investment like (most) closed-end funds… but let’s see which ones they’re teasing here, then you can dig into the details and think them over for yourself. Here are the hints about the first one…
“Bargain CEF Play #1: An 8.8% Payout and 20% Upside
“My first pick hands us an incredible 8.8% cash dividend as I write this… and pays out that dividend every single month.
“What’s more, this fund holds the very best investments for the COVID-19 crisis and beyond: utilities and real estate investment trusts providing services that will be in demand now and after the crisis eases….
“The team at the top has carefully calibrated its biggest holdings to focus on the infrastructure that will be in the highest demand as the 21st century continues to unfold.
“These days, it’s focusing on the safest, highest-yielding electrical utilities (including renewable power producers), whose steady operations back up this pick’s mammoth dividend.”
“Now is a terrific time to buy – because this fund trades at a totally undeserved 9% discount….”
Thinkolator sez that’s Nuveen Real Asset Income and Growth (JRI), which as of yesterday trades at about a 9% discount to its $16 net asset value (NAV), is about 28% levered (most closed-end funds use borrowed money, typically 15-40%, to boost their returns — something that helps to juice dividend distributions in a bull market but can hurt when rates rise, markets crash, or the debt becomes a burden), and pays a distribution of about 8% (9.65 cents/month). The amount of the distribution was reduced from 11.7 cents in March of last year, when the pandemic hit, but has stayed steady for a year now, with about half of the distribution “income” from the dividends and half “return of capital.”
The bad news? That’s the heaviest reliance on “return of capital” that they’ve ever had with this fund, which is about ten years old, the expense ratio is fairly high at 1.8% (not including the cost of leverage — total 2.26%), and the current discount at which the fund trades is actually a little below average (according to CEFdata.com, the average discount has been almost 13%, and the lowest discount 6.4%).
The good news? Leverage is pretty cheap, these are not shockingly overpriced assets that the fund owns (mostly utilities, MLPs and REITs), the fund is still below its pre-COVID highs, and a 9% discount is pretty decent these days and helps boost the yield (the yield on NAV would be only 5.6%, but since you’re paying a discount you get a 8% yield). Like many closed-end funds, it will be interest rate sensitive (they have to pay to borrow, and as an investment it’s seen as competing with bonds and other income investments that might be lower risk, so if yields go up for lower-risk investments, the yield will probably go up for this fund, too… and if the effective yield for new inve