by Bryan Perry | May 23, 2014 9:47 am
Money goes where it is best served — and right now, that means all-season stocks and high dividend funds that don’t depend on the Internet or breakthrough phase 3 trials to satisfy investors.
At this juncture, the name of the game is cash flow in the form of dividends and distributions while the market proves its value in light of the external uncertainty that’s out there in the geopolitical landscape.
Corrections come when markets least expect them, and clearly high-valuation stocks have undergone a fierce re-pricing of what investors believe to be growth at a reasonable price. So, while the go-go stocks garnered most of the headlines in 2013 on hugely bullish expectations, utilities, defensive blue-chip stocks and high-yield assets have been the tortoises that are winning the race in 2014 so far amid little fanfare.
If this long, protracted period of low interest rates continues, then money will keep flowing into the dividend-paying names in the sectors I like the most right now. The rotation into yield-bearing assets is likely to be ongoing, as there’s really nowhere else to go for such high yields with low risk.
With that in mind, let’s take a look at two closed-end funds that pay out annual yields of over 8%.
Given the strength we’ve seen in blue-chip leadership stocks, you can see why I really like closed-end funds and the convertible debt market for income purposes. With the goal of capturing not just high yield, but also exposure to the global shift towards blue-chip, dividend-paying stocks and convertible securities, let’s take a look at the AllianzGlobal NFJ Dividend, Interest and Premium Strategy Fund (NFJ), a diversified, closed-end fund that sports a current yield of 9.6%.
One great way that select funds such as NFJ are generating income is by owning convertible securities. These take the form of either convertible bonds or convertible preferreds, both of which allow the holder to “convert” that security into the underlying shares, similar to an equity option contract.
For example, say you have a Google (GOOG) convertible bond that’s convertible at $550 a share. If the stock moves up to $600, then the holder may want to convert the bond into GOOG shares, since he or she can do so at a $50 discount to the current market price. And that’s typically what will happen if the stock makes a big move: a convertible-bond-fund manager will convert the bond into the common stock, sell the common right away, and then reposition those funds.
Quite simply, the NFJ fund invests in dividend-paying common stocks and income-producing convertible securities, while also utilizing a covered-call options strategy. In the case of NFJ, its top stock holdings include Metlife (MET), Wells Fargo (WFC), Total SA (TOT), AT&T (T) and ConocoPhillips (COP), and its top convertible holdings include Bank of America (BAC), ArcelorMittal SA (MT), Chesapeake Energy (CHK) and Gilead Sciences (GILD).
What’s also nice about this closed-end fund is that it’s trading at a slight discount to its net asset value, which in my view is always a bonus when purchasing ETFs. Overall, NFJ is a good fit for high-yield portfolios and should perform well in the months ahead.
The hunt for even more hybrid income that is tied to a rising equity market is what led me to the Calamos Global Dynamic Income Fund (CHW), another closed-end fund that “seeks to provide a high level of current income with a secondary objective of capital appreciation,” according to the company’s website. This is about as eclectic of an income pick as one can own against the current trading landscape, but one that I view as a sound fit for income investors within the high-yield area that the market has been rewarding.
The company states that it “has maximum flexibility to dynamically allocate among equities, fixed income securities and alternative investments around the world,” and its managers deploy a multi-tiered strategy of owning equities that utilize a covered-call strategy (48.6%), short-term corporate debt (22.8%) and convertible bonds (19.6%), with a smaller weighting in convertible preferred stock (4.5%).
There has been resurgence in European equity markets in recent months, and multinational companies like Novo Nordisk (NVO), SAP AG (SAP), Accenture (ACN), Danone SA (DANOY) and Roche Holding AG (RHHBY) are among the fund’s top European holdings. These complement CHW’s domestic holdings in United Technologies (UTX), Apple (AAPL), SanDisk (SNDK) and MGM Resorts (MGM), all of which are held in the form of convertibles or common stock.
The fund went public in August 2012, manages $834.4 million in assets and deploys structural leverage to the tune of 27.3%, or $230 million in leveraged assets. In a market where the ability to find good deals is becoming more and more difficult, the fact that CHW trades at an 8.4% discount to its net asset value (NAV) offers investors a real blue-light special of an entry point.
Given this very attractive entry point, along with the fund’s monthly distributions that account for a current yield of 8.9%, owning CHW fits nicely within my high-income strategy for both conservative and aggressive income investors.
Bryan Perry has been bringing his wealth-building insights to individual investors and institutions for nearly 30 years. Find out more about his experience and his “Cash Machine” income newsletter here.
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