Don’t lament the lack of a Santa Claus rally this year, because it comes with a bright silver lining: we dividend investors have more time to pick up big yields on the cheap.
Here’s why: America’s economy is still growing, with analysts booking forecasts for 3.7% earnings growth in the fourth quarter of 2022. What’s more, sales for S&P 500 companies are up 10%, and earnings have been rising all year.
Yet the market is still downbeat.
In other words, share prices are divorced from reality, and it’s only a matter of time before they correct. However, given the year we’ve had, it could still be a while before investors develop an appetite for stocks again.
But we don’t have to content ourselves with sitting in cash—or buying now and hoping that the next updraft is coming soon. We can take advantage of this lull to pick up my favorite investments: closed-end funds (CEFs) trading at big discounts to net asset value (NAV, or the value of their underlying portfolios). CEFs also sport healthy dividends, normally of 7% and higher. And their yields are especially high right now, again thanks to the pullback.
This way, we don’t have to worry about trying to time the market. We can start collecting these big—and often monthly—dividends now, while we wait for our funds’ discounts to snap shut, propelling their shares higher as they do.
This discount/dividend combo is the best thing about CEF investing. And now we have a great window for putting it to work. Here are three bargain-priced CEFs to start with.
1. SRH Total Return Fund
Our first standout CEF is the SRH Total Return Fund Inc (NYSE:STEW), a little-known fund trading at a 16.6% discount to NAV, with a focus on value investing. In fact, if Warren Buffett ran a CEF, it would likely look a lot like STEW.
STEW’s Top Ingredients: Quality and Value
Source: Parallel Advisors LLC
Buffett’s own Berkshire Hathaway (NYSE:BRKa) (BRK.A) makes up a third of the portfolio, so we can think of STEW as a way to get Berkshire for nearly 17% off the market price, thanks to the fund’s discount. That also goes for other top holdings, including Buffett favorites like JPMorgan Chase (NYSE:JPM) and Microsoft (NASDAQ:MSFT), as well as great firms with healthy cash flows, like Yum Brands (YUM) and eBay (NASDAQ:EBAY).
STEW’s yield is admittedly low for a CEF, at 4%, but that’s part of its conservative approach. The fund likes to grow its payout as its own market price and the value of its underlying portfolio increase. As you can see, this has worked out very nicely in the last five years, during which have STEW’s dividend jumped nearly 268%!
Big Payout Gains With STEW
In other words, if you hold this one for years, you’ll set yourself up for a nice increase in the yield on a buy made now.
2. Adams Diversified Equity Closed Fund
If, however, you don’t want to wait for your yield to grow, consider one of the oldest CEFs in the world, the Adams Diversified Equity Closed Fund (NYSE:ADX), which was launched back in 1929.
This fund, which trades at a 15.7% discount to NAV, has seen everything: bubbles, recessions, depressions, you name it, and it’s still going strong. Despite its age, its portfolio is built for the future, with Microsoft, Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), and Mastercard (NYSE:MA) as top holdings, among other great cash producers (Berkshire Hathaway also makes an appearance).
This has all translated into a fund that’s booked a solid long-term return.
ADX Is a Proven Wealth Builder
One thing to bear in mind is that ADX links its dividend with its NAV, so the payout does tend to fluctuate. However, the fund does have a policy of paying out at least 6% of its 12-month average month-end market price as dividends, so you know it will deliver a much better-than-average income stream. And sometimes that income stream is much more: ADX yielded over 15% on a trailing 12-month basis in 2021, and it’s yielded over 10% in several years over the last two decades.
ADX’s Healthy Special Dividends
3. Nuveen Global High Income Closed-End Fund
If you want a double-digit income stream now, consider the Nuveen Global High Income Closed-End Fund (NYSE:JGH). This 12% yielder will give you $100 per month for every $10,000 invested, which shows how quickly JGH and CEFs like it can help you realize financial freedom.
JGH holds corporate bonds, which put it in a great position today. This year’s interest-rate hikes have caused yields on corporate bonds to soar, which is why profitable firms are now borrowing money from JGH at rates upwards of 6.5% and as high as 8.75%.
These high coupon rates fuel JGH’s double-digit payout. But the fund’s 12.1% discount to NAV also means the fund’s management needs to get a lower overall return to sustain current dividend payouts to shareholders. (Because that 12% yield is calculated based on the discounted market price, not the NAV, which is the true value of JGH’s portfolio.)
While JGH’s payouts still aren’t entirely safe (the fund has cut its dividend four times in the last decade), they have held steady for the last two years, and they’ll find support in the fund’s high coupon rates. And that means a 12% income stream is still very much on the table for investors who buy now.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."