Today IaEURtmm going to show you nothing less than a aEURoedividend unicornaEUR: a closed-end fund (CEF) yielding 8.8% thataEURtms raised its payout 24% in just the last six months. (And yes, itaEURtms primed for many more hikes, too.)
Get this: because of the weirdness of the CEF market, this cash machine is still cheap todayaEUR"trading at 13% off its aEURoeretailaEUR price!
LetaEURtms dive in.
IaEURtmm talking about the PGIM High Yield Bond Fund (ISD). ItaEURtms a smaller CEF (with just $552 million in assets). That small size helps set up our chance to buy cheapaEUR"and IaEURtmll say more about why this deal exists in just a moment.
First, though, if youaEURtmve been reading my columns on Contrarian Outlook, ISDaEURtms name might sound familiar: two weeks ago, I highlighted a buying opportunity in the fund, writing that its huge discount is aEURoegoing to disappear soon.” The reason? Its aEURoeimproving dividend-growth potential.aEUR
As if on cue, Prudential, the fundaEURtms managers, announced less than a week later that ISD would hike its dividendaEUR"part of a recent trend thataEURtms seen the fund raise its payout 24% this year alone:
8.8% Dividends and 24% Payout GrowthaEUR"in 1 Buy
Heck, weaEURtmd be happy if ISD kept its 8.8% dividend where it is. But an 8.8% yielder with a payout growing this fast is unheard of.
And those hikes will likely keep on coming, for one reason: the Federal Reserve.
Management Reads the Fed Like a Book
LetaEURtms quickly go back a few years. In 2015, when the Federal Reserve started raising interest rates, ISD had a strategy specifically designed to profit from the FedaEURtms hikes. At the time, ISD specialized in buying short-term corporate bonds, which are less sensitive to rate hikes than longer-term bonds.
That strategy helped ISDaEURtms net asset value (NAV, or the value of its underlying portfolio) top the high-yield bond index, shown below by the SPDR Bloomberg Barclays High Yield Bond ETF (JNK):
ISD Taps the Fed for Benchmark-Beating Returns
Not only did ISD investors get corporate-bond exposure, they also snagged bigger gains and bigger dividends than they would have with JNK, which only yields 5.6%. The result was a larger total return and a bigger income stream.
aEURoePowell PivotaEUR Leads to a Strategy ShiftaEUR"and More Gains
Then, in early 2019, ISD changed its name and its mandate. As the Fed made clear at the start of the year, the central bank would pivot from raising rates to cutting them. The first cut came in July, and the market is expecting another later this year, with the possibility of two or more over the next 12 months.
In response, ISD pulled a 180. In March of this year, Prudential announced that the fund would abandon its focus on short-term corporate bonds and become a broader high-yield bond fund. The reason is simple: in a market where interest rates are going down, long-term high-yield bonds tend to go up in value.
And ISD is taking advantage, riding its new strategy to market-beating returns, with much less volatility than stocks:
New Strategy Ignites ISD
About That 13% Discount aEUR
Latest Markets Videos
- Stimulus Update: MIllions Will Get a Stimulus Check in June. Are You One of Them?
- Social Security Checks Could Soar in 2023: Here's How Much Extra Seniors Might Receive
- Better Buy: Dogecoin vs. Terra Classic vs. Terra (LUNA)?
- Bitcoin Uses 50 Times Less Energy Than Traditional Banking, New Study Shows