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 investors goes up, all else being equal, that means the price has to go down). This is a monthly dividend payer, which is also common for closed-end funds.
This fund definitely prioritizes income, so they’ve bought some of the higher-yielding REITs and utilities, which helps to provide a much higher yield than you would from average players in those sectors… REITs like STAG and MPW (I also own MPW, for what it’s worth) pay much higher yields than many others… so instead of getting a dividend of about 3.5% (that’s roughly what you’d get from an average “utilities and REITs” portfolio today), you get 5.6%, both from selecting higher yields and from the benefits of leverage, and you also get to buy that at a discount. If you’re very much income focused, that can be a decent deal… just don’t expect to beat the market or accumulate a lot of capital with these kinds of investments.
What else do they tease here? These are the clues for number two…
“Bargain CEF Play #2: A 6.5% Payer With Totally Ignored Upside!
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just click here...“My second pick is a high-yield bond fund trading at an unheard-of 8.5% discount as I write this. That’s despite the Federal Reserve promising to go to the wall for the bond market.
“But investors are choosing not to see that game-changing fact, giving us an unbeatable chance to buy in. That wide discount also stems from 2 other things that have kept this fund off the radar of the “first-level” crowd….
“It’s made a quiet shift in its strategy that’s driven it nearly triple the return of its benchmark since it made the switch….
“This fund is run by a major insurance company that doesn’t pay much attention to CEFs. That means the all-star team behind this fund, as well as its dividend, just don’t get a lot of marketing thrown behind them.”
Best guess here (and yes, it is a bit of a guess) is PGIM High Yield Bond (ISD), which is indeed run by the asset management affiliate of a major insurance company (Prudential (PRU)… whose stock itself yields 5%, by the way). I don’t know exactly what “strategy shift” they might have had, and PGIM is certainly not an “afterthought” company for Prudential (they manage about a trillion dollars), but it’s probably fair to say that the closed-end funds are not a priority for that particular asset manager.
ISD currently carries a distribution yield of about 8.1% (10.5 cents/month), and trades at roughly an 8% discount to NAV at the moment. You can see their latest quarterly commentary and the other basic fund info on their website here. The fund seems to follow the same basic strategies as some of PGIM’s big mutual funds, like PGIM High Yield (PBHAX), and it has the same management team, but the combination of leverage, the high leverage-fueled distribution, and the shifting discount/premium dynamic you can get with closed-end funds means that ISD has outperformed those similar-sounding mutual funds in recent years.
Another? Sure, let’s see what we can find.
“Bargain CEF Play #3: A Solid 6.6% Dividend No One’s Talking About (for now)
“Imagine a fund holding all the stocks you know well: blue-chip names with staying power, like Alphabet (GOOGL), Home Depot (HD), Netflix (NFLX) and Microsoft (MSFT)….
“… throws off a 6.6% dividend and lets you buy all of these top-notch names at a 12% discount.
“There’s more, too, because this fund also employs a savvy strategy that both boosts its dividend income and cuts its volatility at the same time, making it perfectly suited for the continued market volatility we’re likely to see until the coronavirus comes completely under control.”
This could be a lot of different closed-end funds, there are several that have a dividend trading strategy and buy up a lot of those big S&P 500 leaders while also trying to generate extra income. One of the most popular over the years has been Alpine, which is now managed by Aberdeen, so one example that might fit is the Aberdeen Total Dynamic Dividend Fund (AOD) — that has a discount of about 10.5% today and pays a 7.5% dividend, owning big companies like Apple and Microsoft and Alphabet, but also with a focus on dividends, particularly capturing special dividends and boosting returns a little bit by rotating positions to capture more dividends (holding a position through the dividend payment, selling it and moving on to buy the next one to pay a dividend, etc.). Here’s how they describe it on their fact sheet:
“The Fund combines four research-driven investment strategies—growth, value, special dividends and dividend capture rotation—to maximize the amount of distributed dividend income and to identify companies globally with the potential for dividend increases and capital appreciation.”
Frankly, these strategies tend to be expensive (lots of transactions and taxes) and don’t really do particularly well over time, and I’m guessing with this one — that’s not enough info to confirm whether this is really a recommendation being pitched here… just for some comparison, here’s what the total return of AOD looks like compared to the S&P 500 over the past three years:
There are plenty of closed-end funds that offer a similar bargain of higher income and lower total return — in other words, you can generate higher dividend payments if that’s what you want or need, but you usually end up paying for that over time. It might well be worth it to some folks, the steady distribution payments for these funds can be a nice income stream and they’re fairly predictable (unless there’s a financial crisis and all the levered closed-end funds crater because they can’t refinance their short-term debt, like in 2008), but there is no free lunch.
One more?
“Bargain CEF Play #4: A Monster 7.6% Dividend From an Overlooked Sector
“I’ve saved the best for last with our fourth and final pick.
“This one gives us a rare “double discount”: it holds top-notch industrial stocks that have been left behind in the rebound but are set for big gains as the recovery takes hold.
“That’s our first discount.
“The second is on the fund itself: a 5% markdown that’s spring-loaded to gap all the way up to 0% and beyond! Such a move (a near certainty in my books, as it’s happened many times in the recent past) sets us up for a fast price gain just from the closing discount alone!”
OK, so it’s trading at a 5% discount and pays a 7.6% distribution, but owns a bunch of industrial stocks… which means they’re probably using a lot of leverage. Any other clues?
“This one is also beautifully diversified, which helps cut our risk while we enjoy it’s outsized 7.6% payout. In addition to industrial cash cows like engine maker Eaton and conglomerate Honeywell, it holds well-established names from other sectors, like telecom mainstays AT&T and Verizon.”
Thinkolator sez our best match here is Voya Infrastructure Industrials and Materials (IDE), which is indeed a closed-end fund that has a pattern over the past decade or so of closing the discount to near zero and then widening it again. The average discount has been about 10%, though it has also been as high as a 2.5% premium at some points, and the discount right now is about 5%, with a distribution yield of 7.6% per CEFdata.com. Can’t be 100% certain about this match, those aren’t many clues, but it fits.
This is a fund that tends to hold industrial and telecom names for the most part, but all of those teased names are in the top ten holdings. It does not use leverage, according to CEFdata, so that’s a plus, and the expense ratio is high for a mutual fund or ETF (1.2%) but low for a closed-end fund… and in place of leverage they juice their returns with a buy-write strategy, selling options on their holdings to increase their ability to distribute cash. That is likely to help smooth returns, particularly these days, when options premiums are fairly high, though “smoothing” also means “missing huge gains sometimes.” The fund has generated a much lower total return than the S&P 500, and even than the industrial sector in general, so, again, it’s probably a place to look for regular cash income without high-risk leverage, not for total returns.
So there you have it… finally we look at some dividends and closed-end funds, something readers have been asking about as they look for income in a low-rate world. Not terrible ideas, but you do certainly have to enter the CEF world knowing that you’re taking a little risk with the leverage and high expense ratios that these strategies often come with, and that the fluctuation between premium and discount prices can mean a lot of volatility.
If you know you need to collect a fairly high cash dividend from your holdings and don’t like to sell to get to that kind of distribution, closed-end funds can help. If you’re a trader, it might be worth your while to identify some closed-end funds you like and buy them when they’re at relatively large discounts and sell them when that discount closes. But if you’re a regular ol’ “let it compound” investor and don’t need the monthly distribution income that these funds often focus on, it’s usually true that lower-cost ETFs outperform Closed End Funds for the “buy and compound” crowd who are trying to accumulate wealth, not collect income from their savings.
That’s what I think, anyway — your thoughts might differ, and it’s your money so it’s your thinking that really counts. Wanna share it with us? Just use the happy little comment box below… thanks for reading!
CEF Insider and its companions
First of all, I don’t know what that Sprott fund is doing under my name. It just appeared out of nowhere, so please ignore it!
More importantly, however, are my appreciation for identifying the recent recommendations from CEF Insider. That service is one of several run by Contrarian Outlook, and it is by far the most expensive of the group at $399 a year. I find the most useful one to be the Contrarian Income Report at $99 a year, and since I’m actually not looking for portfolio growth, but am looking for consistent income, I really like the CIR. In the last year or so it has produced an average 9% income, while its companion site, Hidden Yields, has produced over 12%. This, despite (or because of) the awful March 2019 drop, which did indeed drop all the REITS in the portfolio into bargain range. At my age I’m finding predictable income to be much more valuable than portfolio growth, although, since I’m still reinvesting all dividends, I’m still getting both. I highly recommend these for income-oriented investors.
i used to be a subscriber to contrarian income report. all of the recommendations that i bought have done quite well. but i stopped subscribing because none of the new additions to the portfolio over the past several months have held true to their promise of a set it and forget it 8% yield. a couple of the recent ones had yields in the 4.5% range. luckily all of the ones that i bought into have very nice yield on cost. and some of them have had wonderful growth as well. unfortunately, the ones that have grown 40 – 100+ percent since i bought them now have pedestrian yields if you were to buy them today.
i did a trial membership to cef insider and found that they also do not deliver on the yields that they tease in their marketing materials. and if you look at bargain cef play #1 above, you’ll see that they boast an 8.8% yield but it’s actually 8% now. 8% is still nice, but it isn’t 8.8%. the biggest reason that i wanted to subscribe to cef insider was to get access to the cef database. it turns out that the cef database is not an actual database that you can search through. it’s more of a chart. and it doesn’t provide realtime data that would be helpful – like the current price, the current yield, etc. it is really just a a static list that gets updated once in a while. i requested my money back, and they complied quickly.
When you mention the “CEF Database” are you talking about something for reference that comes with your subscription, or an outside database that anyone can use, such as the one at “www.cefchannel.com” which is associated with the folks that also put out “Contrarian Outlook?” CEF Channel can be used by anybody, the only thing that irritates some users is that to use it freely, they make you register with your name and email address. That database also features sections on BDC’s, CEFs, Dividends, Energy, ETFs, etc. and you can register for these sections when you use them. There is a wealth of information in this database, however as I am a subscriber to Contrarian Outlook, I get to use it free. I don’t know if those who are not already suscribed to a service published by the Contrarian Outlook group get to use this database freely or not.
One situation that is seldom discussed is the tax and paperwork ramifications of holding Limited Partnerships and some holdings funds within IRA accounts. I narrowly missed that trap recently- my holdings were just below the IRS threshold, which could change whenever the gummint decides they want more of our money. If possible, would you make a note if the Thinlolater ‘s result is subject to those rules, so that those of us who hold our investments inside IRA accounts can avoid the trap ?
Thanks for what you do-it is much appreciated !
There is no special paperwork for holding CEFs, even if those hold MLPs. In this sense, energy and infrastructure CEFs owning MLPs are a convenient way to own MLPs without the paperwork. That being said, MLPs (and accordingly CEFs specializing on MLPs) have been awful investments in the past couple of years, even underperforming the general energy sector. And this is arguably due to intrinsic problems with MLP structure. So, other than as a play on a short-term rebound of energy, MLPs and energy CEFs focused on MLPs are not very attractive investments in my opinion.
Closed end funds are corporations, not partnerships, so there’s no extra step on taxes.
The main problem with MLPs in a retirement account is that when you have a large number of shares invested, and the MLP you are invested in earns a large amopunt of unrelated business income (above the limit allowed in an IRA by the gov’t) then is when the paperwork becomes really obnoxious and you will probably need an expensive CPA’s intercedence to get through the results. The problem with MLPs in the IRA is that there is no way that I have found to be able to predict at what level of holdings you have that the UBIT is going to become a tax nightmare for the IRA. There is a website (www.mlpdata.com) that I used to be able to access for free that would give a list of all the MLPs and that chart would designate whether they have a K-1 tax structure or they ate incorporated and issue 1099 tax forms. If you only keep the MLPs issuing 1099’s in the IRA you avoid the possible tax headaches caused by too much UBIT at the end of the year.
Hello Travis, What do you think about Insurance company ROOT. Andrew Left’s New citron research tweet so bullish about?
You might want to look at the short-interest for ROOT. The last I checked, it was 41.66% with 26.62M float out of 59.66M shares.
Travis, thank you as always. I was wondering what your thoughts are regarding Brett Owens and his Contrarian Income Report.
In the following, https://contrarianoutlook.com/retire-on-monthly-dividends/CTA021721BO
he talks about averaging 8% yield with a “a rock-steady 6.8% dividend trading at a massive discount to NAV.” “You can collect 8% yields and grow your nest egg by 10% every year.”
I am new to this thinking, but with $1M to invest it seems like getting a monthly check, not touching capital, growing capital is a far better deal than an annuity. So what am I missing, it sounds too good to be true, lunch, desert and someone else paying the tab. Thank you for your thoughts.
as a former subscriber whose subscription ran out earlier this month, i can tell you that the current portfolio does not come close to delivering 8% yields with 10% growth. when i joined, the numbers were much better, but that was during the covid crash recovery. yields were exceptionally high because prices had cratered. for example, i bought into a regional bank stock at a price of less than $19/share with a dividend yield (at that time) of almost 7%. that stock has now reached a market price of almost $47, and did go over $50 at one point. the current dividend yield would be less than 3% if you bought it today. there are several other examples like that in the portfolio. it simply isn’t possible to buy the holdings that are in the current portfolio (and designated as a”buy”) and achieve an 8% yield.
thank you
Thanks for this info, Reality. I was contemplating a subscription, but I will pass now. I have a lifetime sub to The Dividend Hunter (Tim Plaehn) and figured there might be a lot of redundancy there.
Do you think The Dividend Hunter is a worthwhile subscription?
The Dividend Hunter generally does no do CEFs so there is little overlap between that and the Contrarian Income CEF report. I use both which helps to diversify my income protfolio.
I have no dog in this fight, but you are still earning whatever the dividend rate amout was on your original investments. Thus, you should hold those investments, but put new money into their new recommendations which do pay 8-10%. Ignore the prices of the funds in the portfolio and look only at the current dividend rates. Buy more when the prices are down so that the rates are up.
Canadians have a peculiar investment vehicle called split shares. Essentially the sponsor buys a $25 worth of high-quality dividend paying companies, Canadian or US. The $25 is split into two: a preferred share for $10, guaranteed a 5% yield, backed up by the whole $25 portfolio. The capital shares get the remaining $15, but the capital gains for the whole package, plus around 10 cents of dividend per month. Many preferred shares are rated by the Dominion Bond Rating Service, DBRS, if you are interested. Unfortunately for the capital shares life insurance companies, banks, utilities etc have gone through a lots of downs and just a few ups since 2009. Unfortunately life insurance companies, banks, utilities etc have gone through a lots of downs and just a few ups since 2009. However, recently they have moved up and the capital shares are basically leveraged investments. The mechanics of split shares are quite complex, but given low volumes they are not very volatile and the yields can be quite high, in the 10-15% range. I own LBS, LCS, DGS, DF, FFN, FTN, DFN.
Not sure if anyone has answered the limited partnership question, but CEFs are generally insulated from the K-1 bugaboo, even though some of them invest in MLPs per force. The funds are responsible for the tax maneuvers in all cases, which is why the ones that invest in MLPs have such high expenses. I’ve owned CEFs in my IRA account for years and have never had a tax issue with them. As for the Contrarian Outlook folks, they also offer the “Contrarian Income Report” for only $39 per year, which I subscribed to at one time. After a brief review of the funds listed above, thanks to the excellent Thinkolater research, I believe the above sleuthed funds to be no better-and perhaps worse-than those in the less expensive report. I myself currently look to the “Seeking Alpha” folks, who regularly provide in-depth summaries on CEFs they believe are the best. A cautionary note to prospective investors…because the funds use either leverage or a covered-call strategy to goose returns, they get tend to get hammered badly in panic sell markets, more so than the underlying equities they hold. This is because they have to unscramble their strategy to meet a sudden influx of redemptions. Many of them were slow to recover from last year’s lockdown plunge. Some cut or suspended distributions temporarily and a few closed down, if I’ve read correctly.
CEFs do not have to sell shares to meet redemptions. Shares are not created after a set amount has been issued, they are a finite number and trade based on supply and demand.
Hi Travis,
Just curious if your Lock Box is a taxable account or a retirement account?
Thanks!
Charlie
Taxable.
Thank you Travis, I’ve just had “The more I learn , the more I realise how much I don’t know” moment but I do know enough to realise that a lot of the managers in these funds aren’t particularly nimble and with leverage involved, unless the manager moved quickly, if a downturn came, the underlying value could take a big old hit. The headline figures of 10% possibly flatter to deceive.
This was one of the few where the longer version made for compulsory reading
It takes real fine questions placed to programming, but you would discover….
Hey, where’d my water cooler forum go at Trade Station?
I subscribe to their Contrarian Income Report and pick up some useful information occasionally. In my view the main problem with that service is that it never reveals the return of capital included in most CEF’s dividends. So they may recommend a CEF because of their 8% div when half of it is ROC.
Let me at least offer my 2 cents. I am managing 10 accounts on any given day have around 60 positions in REITS, CEF”s, BDC’s. Also included in my portfolio is Municipal Bonds CEF’s which do average 4.5% with slightly higher expense ratios. The basic reasoning is tax free monthly dividends with a good chance of appreciation and capital gains, and utilized as a sweep account or money market. My information after many years is from Dividend channel that also offers access to both CEF’s, ETF’s and BDC’s. Also adding to the list is asset managers and property managers.
Another excellent area to find likely candidates is via Seeking Alpha were there are quite a few articles (free) on higher dividend investments.
I can manage my portfolio since its a full time job for retirement, plus I am a long term investor , trader, swing trader, etc.. No amount of information will help unless you are involved as a technical analyst since there is only one truth to the market and that is Price and Volume. Unfortunately a lot of the products need attention and stop losses, trailing stops is a given in any trading environment. Luckily within this world you can easily achieve with some work average of 7%- 12% per year plus capital gains.
You can find that on Schwab if you have an account.
I have been a subscriber to the Contrarian Income report for about 5 years now, and I have found it to be a good value. The recommendations don’t change much over time, so I sometimes delay my renewal for a few months.
I have one account that is entirely CEFs and REITs, with many of them CIR recommendations. CEFs are a different beast, so you have to play them accordingly. They get hammered in downturns, but therein lies the opportunity. My account was down 40% from Dec. 31 2019 to Mar. 31 2020, compared to the SPX down about 28%. I did some opportunistic buying and the account is up 94% since Mar. 31 2020, compared to the SPX up about 72%. The account currently pays 7% in dividends.
I would not recommend buying CEFs in times of stock market highs, as this obviously reduces your long term dividend potential. Make a list of good CEFs, wait for a good downturn, and then pounce. You will be handsomely rewarded. Be sure to heavily diversify. No single CEF is more than 3% of my portfolio. No matter how much research you do, some CEFs have dividend cuts, and they get clobbered when that happens.
I agree with your analysis except that stock market timing is often difficult, particularly with dividend stocks or funds which are often more closely tied in price movements to the bond market rather than the general stock market. For a true income investor not really concerned with capital gains, its easier to just reinvest the dividends every month and cost average your investments over time. For example, on a dividend stock or fund, if you wait several months to try to buy it cheaper, most of the time either the price will not go down or it will go down so little that you will never recover the dividends you would have made while waiting for the lower entry point. Dividend investing is almost all about income stream and not capital gains (stock price).
I recently subscribed to Contrarian Investment Report and began getting these teases to CEF Insider as a “bonus”. I wasn’t inclined to subscribe because of the price and because I don’t have the time to track a bevy of CEFs. Thanks, Travis for spending the time to give us a thorough analysis, which also has the benefit of pointing our which of the CEFs may be worth considering. Also thanks to the commenters; many of you provided useful additional information.
DSL is also interesting, at least judging by the distribution