By Brett Owens
The last time we had this Fed setup, these safe 6%+ paying bonds jumped 20% in the year ahead!
The setup? The likelihood that short-term interest rates (as set by the Federal Reserve) will go nowhere over the next 12 months. To see this weaEURtmll turn to the Fed funds futures, which are contracts that reflect real money being bet on the FedaEURtms upcoming action (or lack thereof). Collectively they comprise the smartest crystal ball available this side of Jay Powell.
Right now, the smart money is giving aEURoeno hikeaEUR a 75% probability between now and January 2020. And when we add in the bets on a rate cut or two, weaEURtmre looking at a 92% chance that rates will either be unchanged or lower this time next year:
Smart Money Bets 75% aEURoeNo HikeaEUR for 12 Months
This is bullish for aEUR" youaEURtmll never guess aEUR" floating rate bond funds .
We have a historical parallel we can draw on. In the summer of 2006, then-Fed chair Alan Greenspan capped off three years of rate hikes. Contrarian Income Report favorite BlackRock Floating Rate Income Strategies Fund ( FRA ) continued to rally until the following summer, even though rates were going nowhere.
The Fed rate remained unchanged while the 10-year Treasury rate traded in a range (between 4.4% and 5.3%). Interest rates were flat, yet floating rate fund FRA gained 20% in 12 months. Who would have predicted that!
WhoaEURtmd Have Guessed? A Quick 20% Return (with Rates Flat!)
This big year was nothing new for FRA, either. Over the past 10 years, the fund has delivered impressive 11.8% annual returns on its net asset value ( NAV ), or the value of the bonds in its portfolio.
And which bonds does it own specifically? Corporate bonds, which are issued by firms to fund future growth.
FRAaEURtms aEURoesecretaEUR is that it buys bonds that are just below the aEURoeinvestment gradeaEUR demarcation. BlackrockaEURtms managers David Delbos, Mitchell Garfin and Josh Tarnow know that it doesnaEURtmt matter what a rating agency says. What matters more is the actual health of the business issuing the bonds, its cash flow, and its ability to service the debt.
ThereaEURtms an absence of big buyers in these underappreciated debt pools. Many pension funds arenaEURtmt allowed to buy bonds that donaEURtmt have the investment grade stamp, regardless of any deeper analysis. As a result, the Blackrock team is able to find value in the Bs, and 94% of the fundaEURtms portfolio in BBB, BB, or B rated debt. HereaEURtms a look at the mix at the end of 2018:
FRA Finds Value in aEURoeB ListaEUR Bonds
So whataEURtms our secret as income investors? We want to select excellent funds like FRA and buy and hold them when they trade at discounts to the value of the bargain bonds they hold.
FRA, after all, is a closed-end fund ( CEF ). And we can be smart about our CEF purchases and buy them:
- For 6% yields or higher,
- And at discounts so that you can snare some price upside to boot!
HereaEURtms why: CEFs (unlike their ETF and mutual fund cousins) have fixed pools of shares. Meanwhile, their prices trade up and down like stocks - which means these funds can sometimes trade at a discount to the value of their underlying assets! You can literally buy a dollar for less .
As I write, FRA pays 6.2% today yet is priced at a 13% discount to its NAV (net asset value). Shares trade for just 87 cents on the dollar, the cheapest theyaEURtmve been in 10 years!
And FRA isnaEURtmt the only floating rate fund getting no respect today. ItaEURtms one of five floating rate funds in the bargain bin. (And by the way, these five are all monthly dividend payers to boot.)
5 Monthly Dividend Payers Yielding Up to 7.6%, Trading for 88 Cents on the Dollar
Here are the five floating rate CEFs with secure 6% to 7% yields trading for an average of 88 cents on the dollar today:
If youaEURtmre interest in these funds, IaEURtmm guessing youaEURtmre keen to add at least one or two rock-solid monthly payers to your portfolio.
IaEURtmll bet youaEURtmve even gone on the hunt for these aEURoeunicornsaEUR yourself. If you have, youaEURtmve probably run up against the No. 1 roadblock that keeps regular folks from building their own monthly income stream: strong monthly payers are almost impossible to find.
ThataEURtms because, as you can probably tell from the 4 names I just shared with you, almost no big S&P 500 names pay monthlyaEUR"so you need to venture to lesser-known corners of the market: investments like real estate investment trusts (REITs), preferred shares and, yes, closed-end funds.
The good news? These are also the very same places youaEURtmll find blockbuster dividend yields!
Take the 21 stocks and funds in my Contrarian Income Report portfolio. As I write, these 21 cash machines pay an average 7.6% dividend yield! And best of all, ten send out cash dividends every single month!
I want to GIVE you access to this entire monthly dividend portfolio right now. Plus IaEURtmll also reveal the 3 monthly dividend plays I see as the very best additions to your portfolio today.
These truly are the best of the best. YouaEURtmll discover:
- An 8.4% payer thataEURtms set to rake in huge profits from an artificially depressed sector.
- The brainchild of one of the top fund managers on the planet thataEURtms giving out generous 9.4% yields.
- And a steady Eddie high yielder that barely blinks when stocks plummet.
I canaEURtmt wait to share all my research on these rock-solid monthly retirement plays with you. Click here and IaEURtmll reveal all 21 of the 7.6%+ payers in my portfolio, my 3 very best monthly payers to buy now and my complete monthly income strategy .