Most discounted closed-end fund with yields up to 8%

Closed-end funds (CEFs) can generate incredible wealth by combining large (often 8% or more) dividends with stock-like price appreciation potential.

But to get the most out of them, you need to focus on one key metric: the discount to net asset value (NAV, or the value of a fund’s underlying portfolio).

No need to get into the weeds here. This is just another way of saying that CEFs can and often do trade at lower prices than the actual value of the portfolio.

So our approach is simple. Buy CEFs when they are trading at an unusually deep discount and let the price rise as that discount disappears. All you have to do is make a profit and sell it. And you’re always collecting that huge payout.

We’ll dive into the three best-discounted CEFs on the market (down to 50%) in a moment. But first, to illustrate just how powerful CEF closing price discounts are, consider the story of a corporate bond fund that did what most people think is possible: beat the tech-heavy Nasdaq. Let’s.

How a ‘sleepy’ bond fund crushed tech’s biggest names

of PIMCO Dynamic Income Fund (PDI) As I write this, the yield is 13.9% (you read that right); even moreIn late October, it was at an incredible 17%, but at that time it was absurdly oversold.

At that time, PDI’s discount rate was down to about 4%. In the CEF world, his discount rates were not very generous, sometimes reaching double digits, but he is coveted in the investment world and is very unusual for a PIMCO fund.

As you can probably imagine, PDI’s discount didn’t last very long and disappeared within a few days.The fund is currently trading at double-digit volumes. premium.

Despite the significant boost AI gave to the index, PDI’s market-based returns exceeded even Nasdaq’s returns, as discounts quickly translated into premiums.

Can this extraordinary revenue and growth story be replicated in today’s market?

Notably, the average CEF discount is currently 8.1%, which is a little high, which makes sense. (Typical long-term discounts are around 6%, depending on how you measure them.)

Additionally, high interest rates make it easier for funds like PDI to raise dividends, with many corporate bond funds paying out more than 7% on average.

That’s what led us to this day. With the discount-driven bull market in PDI currently unfolding, what other funds could turn around?

The first thing to look at is the CEF with the highest discount rate, which is likely to rise in the short term when the market realizes its mistake. His three most discounted CEFs currently available demonstrate how important this type of analysis is.

Cheap CEF #1: Highland Opportunity and Income Fund (HFRO)

Let’s start with HFRO, which yields 7.2%. This is particularly interesting given that in recent years, market price-based returns have exceeded his NAV returns, or the profits and dividends generated by his portfolio. This gives us the largest discount on the market. 50%.

The reason for this boils down to concerns about portfolio quality and management. HFRO ​​has significant investments in assets issued by Nexpoint. Nexpoint Real Estate Finance (NREF), is part of the same family as HFRO’s management company, NexPoint Asset Management. This has made some investors uncomfortable and led them to look at other options.

That being said, how much discount is possible? The 50% writedown occurred at a time when the fund’s assets were recovering strongly from both the pandemic and the 2022 meltdown, despite the lack of portfolio diversification, HFRO was significantly sold off. This suggests that it may be too much.

Cheap CEF #2: SRH Total Return Fund (STEW)

STEW, the second highest discount CEF we’ll look at today, is in a much different position than HFRO, with a well-diversified portfolio spread across high-value assets.

Its holdings include Wall Street’s largest and most successful banks; JPMorgan Chase & Co. (JPM), Not just technology winners; Microsoft (MSFT) and Cisco (CSCO). Portfolio quality is not the issue here.

STEW’s portfolio is very good, in fact, you could argue that it’s not aggressive enough. This may explain why the fund’s discount rate is so large at 21.7%. Its cautious approach to stock selection means it’s something of an alternative to the Dow Jones Industrial Average, an index focused on value rather than growth.

Growth has been in vogue for about 15 years, so STEW may not be all that impressive by comparison. Despite this, STEW has provided investors with an annualized return of 11.5% over the past five years.

There is another, even bigger reason why STEW’s discount is so large. That’s because its dividend is a paltry 3.7%, less than half the average CEF yield of 8.2%. That’s why STEW can’t attract enough attention to lower its discount. However, the situation may change if the dividend is increased.

Cheap CEF #3: Central Securities Corporation (CET)

Finally, let’s take a look at funds that have posted triple-digit returns over the past 10 years. This includes his 2020 and his 2022 financial crisis. Central Securities Co., Ltd. (CET). This company has gotten through it all and is paying out an 8.4% income stream to boot.

At a 20% discount, CET boasts an attractive portfolio of value darlings with strong insurance-like cash flows. Progressive Co., Ltd. (PGR); Growth comes with incredible achievements such as; Analog Devices (ADI); A company with tremendous growth and strong cash flow; Alphabet (GOOGL) and American Express (AXP).

Additionally, as you can see from the ticker mentioned here, the fund is broadly diversified across all sectors and selects the best names in those sectors.

So why is CET so discounted? Because the company pays out one large dividend at the end of the year and a smaller dividend in the middle of the year, with the goal of paying out all of its portfolio’s income and profits as dividends. This is because we have an unusual schedule of publishing once.

The foundation has been doing this for over 20 years and has no plans to stop anytime soon. Investors looking for monthly or quarterly dividends overlook this because they can’t wait a few more months to get paid.

In doing so, they leave money on the table. Smart investors are likely to realize this, and CET’s discount rate will be even higher. And until that happens, buying now means participating in the distribution of over 8% of that highly sustainable.

Michael Foster is the Principal Research Analyst for: contrarian outlook. For even bigger income ideas, click here to check out our latest report.Undying Income: 5 Great Value Funds with Stable 10.9% Dividends.”

Disclosure: None