Throughout the year, we have been patiently waiting for our favorite high-yield investments, closed-end funds (CEFs) that yield 8% or more, to take off alongside the rest of the market.
However, after almost nine months, we are still waiting! This is not surprising since the income-focused investors who purchase these funds tend to be cautious.
But this delay hasn’t bothered us at my CEF Insider service. We have been utilizing this extra time to acquire undervalued funds and build our income streams. Currently, our CEF Insider portfolio has an average yield of around 9%, and many of our picks pay monthly dividends.
A recent report from the Federal Reserve Bank of Chicago suggests that the CEF train might be ready to depart. The report in question is the September issue of the Chicago Fed Letter, which makes the following three key forecasts:
- Inflation will decrease to 2% by mid-2024.
- GDP will continue to grow, albeit at a slower pace.
- Both of the above can be achieved without any further interest rate hikes.
In other words, our economic data is leading to a soft landing. And that means stocks, which are still far from their all-time highs in 2021, are undervalued.
Stocks–and CEFs–Are Not Reflecting the Improving Outlook
Additionally, when we purchase stocks through CEFs like the BlackRock Enhanced Equity Dividend Trust (BDJ) which pays 8.9%, we can get an even better deal. BDJ is currently trading at an 11% discount to its net asset value (NAV), meaning we can access its portfolio of blue chip stocks, including American International Group (AIG), Kraft-Heinz Co. (KHC), Baxter International (BAX), and Medtronic plc (MDT), at a lower cost compared to buying them individually on the public market.
While this report from the Chicago Fed is encouraging, there is a potential hitch. Federal Reserve Chair Jerome Powell has contradicted all three of these statements in recent months and has indicated that the Fed will continue to raise interest rates, despite the market’s belief that it will halt.
As a result, market expectations for interest rates have been rising throughout 2023, and there is uncertainty regarding whether the Fed will raise rates again or maintain stability by the end of the year.
Source: CME Group
Although there seems to be some disagreement within the Fed or a potential change of heart, this report indicates that more economists are trying to persuade Powell against further rate hikes. It is worth noting that Powell tends to take the recommendations of his staff into consideration.
How to Respond
If the Fed expects economic stability, it also anticipates economic growth that is not yet factored into stock prices, as we mentioned before.
Therefore, this is an opportune time to purchase stocks. With CEFs, we not only obtain high yields and discounts but also benefit from diversification. For example, BDJ has significant holdings in financials (24% of the portfolio) and healthcare (21% of the portfolio), which are currently trailing the market. BDJ is thus positioned to seize attractive investment opportunities.
Moreover, BDJ is managed by a team with access to extensive data and research tools, courtesy of BlackRock, an asset management firm with over $10 trillion in assets under management. Additionally, with a management fee of just 0.8%, significantly below the fund’s 11% discount, investors essentially gain access to BlackRock’s team for free.
By focusing on large companies with robust cash flows and a track record of increasing dividends, BDJ can generate its own 8.9% payout by reinvesting dividends and adjusting the portfolio as market conditions evolve. The fund also sells covered-call options on its holdings, a prudent and lower-risk strategy for generating additional income.
Significant and Expanding Payouts from BDJ
BDJ has consistently increased its payouts and occasionally offered special dividends. Interestingly, despite the improved outlook, BDJ’s total-return price has remained relatively flat over the past couple of years due to market panic.
However, even with our more positive expectations, BDJ’s performance remains stagnant. This presents an opportunity for investors to secure the fund’s high income stream at a discounted price.
These 4 Overlooked (For Now!) CEFs Offer a 9.5% Yield. A Fed Shift Will Ignite Them
This relatively unknown report from the Federal Reserve Bank of Chicago is yet another indication that the Fed is moving towards the sidelines. The next step? Rate cuts once inflation approaches the target.
Thanks to the Chicago Fed, we now have a clearer sense that rate cuts are just months away.
Combining this with the significant discounts available on many CEFs, we have a valuable opportunity. To help you make the most of it, I have identified 4 top picks with average yields of 9.5% that are currently undervalued. Furthermore, these picks offer unique discounts that could result in double-digit price increases over the next year.
The time to take advantage of the shift to rate cuts in CEFs is now. Click here and I will share my CEF strategy and provide a free Special Report with the names of all 4 of these attractively priced picks that yield 9.5%.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.