This 9.3% dividend has a secret (hint: it’s much safer than it looks)

OOne of the so-called “rules” of income investing is that you can get a high dividend or a sustainable dividend from a stock or fund, but not both.

And to be fair, this is true for some investments. But there are also many exceptions, the main one being an asset class that exhibits a little-known “trick” that gives us 9% successful dividends that are more than sustainable over the long term.

The secret of the FEC

This asset class would be closed-end funds (CEFs), and the “trick” relates to the fund’s discount to the net asset value (NAV, or the value of investments in the fund’s portfolio).

Don’t dwell on the jargon here – the NAV discount simply refers to a CEF’s unique ability to trade below the per share value of its portfolio. The result is that when a CEF trades at a haircut, the return we get (which is based on the market price) is greater than the return on NAV – or what management needs to earn to cover that return. .

The result is sort of a best of both worlds dividend security scenario.

I know this may still seem a bit obscure, so let’s take a closer look at how surrendering a CEF makes its performance more sustainable. Next, we’ll see how this powerful dynamic plays out with a specific CEF that offers investors a record dividend of 9.3% today.

Source: CEF Insider

Let’s start with the status of CEF-land with regard to discounts.

Over the long term (or over the last 10 years or since the fund’s IPO, whichever is earlier), CEFs have benefited from an average discount of 5.2% compared to the net asset value . However, a boiling stock market means that the current average discount has been reduced to the smallest amount ever recorded by my CEF Insider Service– just 0.8%!

Don’t despair, however; Although CEF discounts are low on average, this is because some funds see a lot of auctions resulting in high premiums and skewing the average. Several CEF vouchers are still sold at a discount.

Now let’s take a look at exactly how these discounts make our dividends more sustainable. For this we will use the example of the Highland Global Allocation Fund (HGLB), a small fund of around $ 210 million in assets under management with investments around the world (half in America) and a mix of real estate, stocks and bonds. . HGLB’s goal is to diversify asset classes to offer investors a good mix of assets and a solid income stream at the same time.

HGLB returns 9.3% as of this writing, way more than the 6.1% for the average CEF (and, of course, much higher than the meager 1.3% return you would get from the average share of the S&P 500).

Source: CEF Insider

The alarm is still ringing in your head? A 9.3% yield sounds dangerously high, and in some cases it can be. But HGLB has a big discount that works in its favor here.

In fact, HGLB trades with one of the highest discounts of any CEF on the market, with a whopping 20.7% net asset value discount. And that discount is shrinking. It was actually twice as big a year ago.

A huge discount, but which is fading

CEFs trade at a discount when investors bid less for a fund than it is actually worth. This can happen for a variety of reasons, but it’s usually a mix of risk averse investors who are afraid of a market pullback (which, ironically, means CEF discounts tend to be the largest after a crash and weakest after a boom) and the general darkness of the CEF market (few CEFs have market caps above $ 1 billion, while the largest ETFs have market caps of several hundred dollars. billion).

Either way, when a fund’s discount falls, its market price rises, providing investors who bought the largest discount a solid return. And HGLB investors get it.

Huge gains for HGLB investors

That 125% return (in earnings and dividends) in just over a year is great, but it’s not the best thing about HGLB. What is really compelling is that the fund’s steep discount today means that its 9.3% dividend, paid out to investors based on the market price, is in fact only 7.3%. for fund managers.

The reason is simple: the fund receives a return on its NAV, not on its market price, which means that it pays its dividend out of the profits of the NAV. And when the discounts are large, the NAV that profit management needs to maintain the dividend is smaller. The lower the haircut, the smaller the gap between the return the fund has to pay and the return it needs to maintain that payout.

In the case of a big bounty, that could be bad news. A 20% premium would mean HGLB would have to earn an 11.2% annualized return to maintain its payments! But with that same amount as a discount, he only needs to earn 7.3%.

And a 7.3% return is lower than the annualized return we’ve seen for stocks (15%) and real estate (8.6%) over the past decade. So while we are outperforming the market, through the magic of CEF haircuts, the fund only needs to get the market return for its payments to be sustainable.

This trick doesn’t only work for HGLB. There are literally hundreds of CEFs that can use their discounts to generate large and lasting dividends.

The 5 best CEFs to buy for a sure dividend of 6.9% and a rise

CEFs also offer another level of security that hardly anyone knows about.

Understand this: Of CEFs that have been around for a decade or more, 96% have made money in the past 10 years. And when you remove CEFs in the volatile energy industry, that number jumps to 99%!

It’s as close to a lossless investment as it gets! And because of the massive CEF returns, you’ll collect most of your return as cash dividends as well.

Right now I’m sharing my top 5 CEFs with the public, and I want you to start collecting their massive payouts now (I’m talking about an average dividend of 6.9% here) and you are in a strong position as well. price increase. My latest forecast calls for price gains of over 20% of these funds over the next 12 months!

Click here to get instant access to these 5 proven CEFs including their names, tickers, purchase prices, and everything you need to know..

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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