By Michael Foster
One of the best things about closed-end fund ( CEF ) investing is the terrific aEURoebonusaEUR discounts CEFs give us on stocks and other investments.
HereaEURtms what I mean by a bonus discount: CEFs often trade at a level far differentaEUR"and cheaperaEUR"than their net asset value ( NAV ), or the market price of a fundaEURtms portfolio holdings.
And these discounts arenaEURtmt peanuts: you can easily snag CEFs trading at, say, $1.00 per share when their aEURoerealaEUR value is $1.10 shareaEUR"or more.
Right now, there are 3 low-risk, highly diversified funds trading at a near 20% discount to their NAVs (17.6%, on average). All 3 boast dividend yields far higher than the average S&P 500 stock, with one set to pay us up to 9% in cash, in the form of a special dividend.
ThataEURtms a deal any value investor should jump at. As Warren Buffett said, the best investors buy aEURoephenomenal businesses at discounted prices.aEUR The only problem, of course, is that those discounts are hard to find! Yet these 3 funds are serving them up on a silver platter.
Before we get into why these 3 funds are so cheap, letaEURtms talk about why this sale is happening in the first place.
A Scared Market
The stock market is weird right now.
Stocks should be skyrocketing, if you just focus on fundamentals; so far in the first quarter, earnings are up 24% from a year agoaEUR"a meteoric increase thataEURtms far ahead of the already lofty expectations analysts had put out before earnings season began. But even so, the market is flat on the year.
Mr. Market Takes a Nap
There are many reasons why the S&P 500 isnaEURtmt rising, but none have to do with the crucial facts: wages are up, consumer spending is surging, jobless claims are falling and profits are exploding. Since all this strength is hitting the markets and prices are still flatlining, the S&P 500aEURtms forward P/E ratio is plummeting:
A Quick Pivot From Pricey to Cheap
What does this tell us?
Mainly that the market is discounting companies despite their phenomenal results. And when we go a step further, into the CEF world, those discounts get magnified by a huge opportunity CEFs provide: something I call aEURoeamplified terror.aEUR
The aEURoeAmplified TerroraEUR of CEFs
aEURoeAmplified terroraEUR is a term I use to describe the behavior of CEF buyers broadly. When the market is fearful, CEF investors tend to be extra fearfulaEUR"and any moment of caution in the markets tends to be amplified in CEFs.
Before I explain why, let me detail exactly what IaEURtmm talking about. If we look at the CEF Insider Equity Sub-Index , we see that it has fallen a bit below 2% in 2018:
CEFs Amplify the Fear
Remember that equities are flat year to date, which means CEFs are doing a bit worse.
This is our opportunity.
The reason why is simple: when the market gets afraid, CEF investors get terrifiedaEUR"and the opposite is also true. When the market gets greedy, CEF investors get extremely greedyaEUR"which means CEFs can go up a lot faster than stocks in good times. For a patient CEF investor, these downturns are opportunities to get bargains, and the best part is that CEFs offer high yieldsaEUR"so youaEURtmre getting paid while you wait for the market to wise up.
And as I mentioned off the top, there are 3 funds offering this opportunity in spades.
A 3-Buy Discount aEURoeSwing PlayaEUR
To play against stock market fears and CEF terror, there are 3 funds you should consider now: Dividend and Income Fund ( DNI ) , GDL Fund ( GDL ) and General American Investors ( GAM ) .
I am spotlighting these 3 funds in particular because of their unusually massive discounts to NAV and their conservative market approachaEUR"a best-of-both-worlds opportunity for investors who want maximum return with minimal risk.
Underpriced Equity Funds Are a Rare Bargain
While DNI sports the biggest discount out there now, GDL and GAM make the top-10 list, as wellaEUR"and each pays a nice dividend. While DNI and GDL pay around 4.5%, on average, GAM pays a special dividend at the end of the year that varies a lot. Last year it was 12%, and I expect it to be above 9% this year for investors who hold through December. That makes for a compelling income stream just by holding these 3 funds.
But thataEURtms not the main reason I like these funds now. With their massive discounts, they are poised for major short-term capital gains.
How do I know? Because this has happened before.
A Snapshot of History
When the market panicked in early 2016, these 3 funds saw their discounts widen due to the amplified terror of CEFsaEUR"creating a rare buying opportunity.
These 3 funds then exploded by the end of 2016, creating double-digit gains, thanks to the stock marketaEURtms irrational fears and the even more irrational fears of CEF investors. Since 2016 was a year a lot like 2018aEUR"starting off weak despite tremendous earnings growthaEUR"thereaEURtms good reason to expect history to repeat very soon.
A aEURoeHiddenaEUR World Where YouaEUR"Not Wall StreetaEUR"Hold All the Cards
Big discounts and monster dividends are just 2 of the reasons why every investor should hold at least a few CEFs in their portfolio.
And theyaEURtmre just the start.
ThataEURtms because, due to the CEF marketaEURtms small sizeaEUR"it adds up to about 15% of the cash in CEFsaEURtm (overhyped) cousins, ETFsaEUR"the big guys stay out, leaving a wide-open field of bargains for you and me to pounce on.
Take it from superstar investor Boaz Weinstein, who made a killing betting against the ridiculous trades of JPMorganaEURtms London Whale. He recently called CEFs aEURoea rare corner of the market where retail investors can get an advantage over institutions.aEUR
I couldnaEURtmt have said it better myself!
But the big guys are starting to take notice of the huge discounts and massive dividends on offer hereaEUR"which is why, if you want to snag the biggest bargains, you need to make your move into CEFs now.
Take it from Weinstein himself, who recently dropped a cool billion into these low-key funds. And high-fliers like Bill Gates, Bill Ackman and Jeffrey Gundlach are also CEF investors.
To help you get a leg up, IaEURtmve just released my 5 favorite CEFs to buy now in a new, FREE Special Report you can download here . These 5 powerhouse funds yield an average of 8.2% todayaEUR" and thataEURtms just the average!
One pays an incredibleaEUR"and rock-solidaEUR"10.0%. ThataEURtms enough to hand you $10,000 in CASHaEUR"every yearaEUR"on a $100,000 investment!
Imagine what that could do for your retirement portfolio.
A 28% Total Return in 12 Months
Better yet, just like the 3 funds I showed you above, these funds all 5 high-yielders trade at ridiculous discounts. ThataEURtms why IaEURtmm calling for 28% total returns aEUR"including those hefty cash dividendsaEUR"from my top 5 CEFs in the next 12 months!
Their discount windows are already starting to close, though, so now is the time to buy. CLICK HERE and IaEURtmll give you these 5 breakout fundsaEURtm names, ticker symbols, buy-under prices and much more .