This week, we’re going to pick up some rich 8%+ payouts alongside … Taylor Swift?
You read that right. Turns out the favorite singer of everyone from, well, my two daughters to the attorney general of the United States is a fan of our favorite income plays: closed-end funds (CEFs).
That news broke in the form of a tweet from billionaire investor Boaz Weinstein, head of Saba Capital Management. Weinstein apparently heard from Swift’s dad (who used to work for Merrill Lynch) that the singer does, indeed, hold CEFs.
“Having a blast watching our daughters sing every lyric tonight in Philly,” Weinstein tweeted. “Did you know that @taylorswift13 invests in discounted closed end funds? You think I’m kidding, but her father, Scott, told me so!
In some ways, that’s no surprise. Swift has long been known to be a canny financial operator. She was, after all, one of the few celebs who saw the FTX crypto mess coming a mile off, refusing to endorse it while others—Larry David, Tom Brady and even business “expert” Kevin O’Leary among them—got pulled in (and are now facing a class-action lawsuit).
But even so, CEFs are a pretty obscure corner of the market, even for a savvy investor, with only 500 or so out there. But Swift apparently knows the score: as Weinstein says, she not only buys CEFs, but focuses on CEFs trading at a discount to net asset value (NAV).
We contrarians agree—so much so that your income strategist wonders if Swift has been browsing the pages of Contrarian Income Report.
We’ve long panned the idea of buying CEFs at a premium. So we never, ever, ever do it. (Sorry, couldn’t resist!) But buying at a discount sets us up to “ride along” as that deal disappears, propelling the CEF’s price toward the fund’s NAV as it does.
And while we wait, we pocket a rich dividend, too. These days, payouts north of 8% are common in the CEF world.
Weinstein, who you may remember made a fortune back in the mid-2010s betting against the JPMorgan trader known as the London Whale, is a fan of CEFs, too. Here’s what he had to say about these funds back in 2017:
“You go into it hoping the discount will narrow on its own, but one of the nicest points about this investment is that while you wait, you earn an above average yield, given the discounted price.”
That’s one of the best quotes I’ve ever seen on the power of CEFs. But it is missing one detail: buying CEFs at a discount alone isn’t quite enough—you need to look at the discount as it relates to its historical pattern.
After all, a deep CEF discount is no good if management has no plan to close it. Which is why we want to avoid CEFs that are always cheap, like the Royce Micro-Cap Trust (RMT), which sports a 13% discount to NAV and yields around 9%.
Trouble is, RMT always trades at a discount—and that discount has actually gotten wider over the last five years!
That falling discount has been a lead weight on RMT’s market price. Sure, RMT investors have pocketed a 23.5% return, but that’s less than half the S&P 500’s 65%. And even that 23.5% is entirely because of the dividend. On a price basis, RMT is down significantly.
That’s why we want to see management with a plan to close a CEF’s discount. This way we have two ways to win (three when you include CEFs’ high dividends!):
- NAV gains, from the appreciation of the CEF’s portfolio, and ..
- Closing discounts, which we can see as a kind of afterburner, giving our returns an extra lift.
The Eaton Vance Tax-Managed Global Diversified Equity Income Fund (EXG), holder of large caps like Apple (AAPL), Amazon.com (AMZN) and Coca-Cola (KO), is a terrific example of a closing discount in action.
From the time we added it to our Contrarian Income Report portfolio in October 2020 until we sold in February 2022 (just sidestepping the market dumpster fire that was to come), EXG’s discount narrowed from around 10% to 3.7%, driving a 28% gain in the share price in just under a year and a half.
There was more. Because in addition to its portfolio gains and the upside from its closing discount, EXG rewarded us with dividends during our holding period, to the tune of $1.03 for every share held, essentially “paying back” 14% of the $7.51 per share we paid for the fund.
The end result: a quick total return of just over 42%!
The best part is that you don’t have to be rich to profit from CEFs. Like Weinstein and Swift, we can pick up discounted CEFs on the open market and start tapping their 8%+ dividends (often paid monthly) straight away.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
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