Are bonds boring? Not if you waste more than 10% in dividends

Bonds are return, baby. Let’s talk about three funds that pay between 8.3% and 10.9%.

In addition, the components are trading at less than their fair value. Free lunch time at Bondland.

Of course, not all bond funds are created equal. ETFs serve that purpose, but the paying party is a closed-end fund (CEF).value plus Yield at CEF Cafe.

Most ETFs track an index. That means it’s run by rules and robots. boring.

CEFs tend to be actively managed, meaning that “bond brains” can adjust their portfolios from defensive to offensive as the investment environment changes. You can also use leverage to increase your profits. This can hurt both parties, but when money is cheap, we prefer managers who increase leverage.

Your CEF payments will also simply be higher.Let’s choose iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD LQD), one of the high dividend ETFs. However, the LQD pays only half of what the CEF 3-pack we’re going to discuss.

Again, each of these funds discount Convert to net asset value (NAV). That means he can buy $1 worth of assets for less than $1. sweet.

First Trust High Yield Opportunities 2027 Term Fund (FTHY)

Distribution rate: 10.8%

of First Trust High Yield Opportunities 2027 Term Fund (FTHY) It’s more of a tactical play than a long-term hold. It will not exist after 2027!

FTHY managers are required to hold at least 80% of their assets in below-investment grade (junk) bonds. Currently, that figure is close to 85%, with the remaining assets held in senior loans.

This fund’s average maturity is on the shorter side at just under 4.5 years, so you won’t necessarily get the same amount of volatility you’d get from a fund that’s more sensitive to the longer end of the yield curve. Still, FTHY is not a bad way to trade on the short end of the yield curve. especially Considering that around 20% debt leverage helps generate profits.

If your goal is to take advantage of lower bond yields (and therefore higher bond prices), FTHY is certainly more attractive than your average short-term bond fund. The 10.8% distribution paid monthly isn’t bad either.

Interestingly, FTHY’s 8% discount to NAV, while impressive, is lower than average. But this is deceptive. Because as a term fund, the gap between now and the end of his term in 2027 should narrow. Discounts should shrink and prices should rise. ) What if you turn it around? “Because the Fund has a limited life, it may invest in lower-yielding securities or hold the proceeds of securities sold near the end of the term in cash or cash equivalents.”

In other words, not only will you not be able to buy and hold FTHY for long periods of time, you will also lose the ability to outperform the fund. did it It will decrease as the expiration date approaches.

BlackRock BLK Core CORE Bond Trust (BHK)

Distribution rate: 8.3%

of BlackRock Core Bond Trust (BHK) is a “North-South football” fund that invests at least 75% of its assets in investment-grade bonds.

Currently, this is a mix of corporate, securitized products, government mortgages, government bonds, and some international investment grade bonds. BHK currently holds about 20% of junk stocks.

BHKs are where you can start taking advantage of the eventual drop in long-term interest rates. Nearly two-thirds of the fund is invested in bonds with maturities of five years or more, and more than one-third are invested in bonds with maturities of 10 years or more. This possibility is further magnified by his even higher debt leverage than FTHY, at 33% as I write this. This is a portfolio set up to win and win big when interest rates are falling, just as BHK did for years leading up to the Fed’s latest rate hike cycle.

But BHKs are not for the faint of heart.we do that do not have You want to own a BHK when long-term interest rates are rising.

Also, yes, this BlackRock fund is trading at a discount to NAV, but the range is just over 1%. In fact, at 99 cents on the dollar, this CEF is expensive considering its long-term average is close to 3%.

Brookfield Real Asset Income Fund (RA)

Distribution rate: 10.9%

Brookfield Real Asset Income Fund (RA) There’s a reason it’s cheap. We can buy the asset for 87 cents on the dollar. This is a 13% discount, which seems generous at first glance.

The problem is that, despite its name, RA invests in infrastructure, real estate, and natural resource credits, not “real assets.” Approximately 60% of assets in these three areas are dedicated to corporate bonds, with the remaining 33% held in mortgage-backed securities (MBS). Another 4% is written off in cash and the remaining tiny fraction is invested in “real asset” stocks.

This used to be contrarian earnings report I held onto it until I sold it in November 2018. At the time, I warned:

“The fund’s generous distribution (over 10%) as well as its equally generous discount (6% to 9%) gives us a margin of safety, while giving us access to their promising management team. It gave them time to adjust their strategy. But frankly, they don’t.

The current average coupon payout is just 4.8%, while NAV expects a 10.4% distribution. Borrowing cheap money can help fill some of the gap, but it’s not enough. And the portfolio is still too focused on fixed-rate and long-term bonds for my tastes. ”

For the next five years or so, the monthly dividend remained constant while the NAV plummeted. Shareholders finally paid Piper in August, when the company announced a 41% cut in distributions starting in September, and RA’s stock price plummeted.

At least for now, we are left with more sustainable payments. RA distributions are currently funded by actual income. The fund also has less exposure to the ticking time bomb of commercial real estate. The company’s commercial MBS account for his 10% of assets, which is better, but not enough for the cautious contrarian investor.

Brett Owens is a top investment strategist in the United States. contrarian outlook. For more great income ideas, get his latest special report for free. Early Retirement Portfolio: Earn huge dividends every month, forever.

Disclosure: None