{"id":12539,"date":"2023-05-23T07:56:22","date_gmt":"2023-05-23T11:56:22","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/these-2-mystery-ingredients-can-drive-11-yearly-returns-in-cefs\/"},"modified":"2023-05-23T07:56:23","modified_gmt":"2023-05-23T11:56:23","slug":"these-2-mystery-ingredients-can-drive-11-yearly-returns-in-cefs","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=12539","title":{"rendered":"These 2 ‘Mystery’ Ingredients Can Drive 11%+ Yearly Returns In CEFs"},"content":{"rendered":"
\n

When I talk to investors about closed-end funds (CEFs), I get an almost universal reaction: they simply can\u2019t believe the outsized dividends\u2014and upside potential\u2014these funds boast are for real.<\/p>\n

I\u2019ll admit, if you\u2019re not familiar with CEFs, their many benefits do<\/em> sound a bit over the top: a pocket of funds that yield 7.5% on average, yet hold investments we\u2019re all familiar with, such as shares of Alphabet (GOOGL) <\/strong>and Mastercard
\n
\n MA
\n <\/fbs-ticker> (MA)<\/strong>? <\/strong><\/p>\n

The outsized payouts seem particularly unreal when you consider that most of these blue chips pay low (or no) dividends themselves. And that\u2019s before<\/em> we get into the fact that CEFs can hold a range of other investments beyond stocks, like corporate bonds, real estate investment trusts (REITs) and municipal bonds.<\/p>\n

Moreover, whether they hold stocks or not, many CEFs\u2014which are actively managed\u2014beat their benchmarks on the regular, putting the old debate over passive-versus-active investing to bed once and for all.<\/p>\n

<\/fbs-ad><\/p>\n

Picking Winning CEF Is All About the Dividends and the Discounts<\/h2>\n

The truth is, there are two important ways CEFs deliver strong returns: their outsized dividends (which we\u2019ll \u201cdemystify\u201d now) and their discounts to net asset value (NAV, or the value of their portfolios), which we\u2019ll delve into in a second.<\/p>\n

The best CEFs deliver their big dividends in a pretty straightforward way: management simply sells its winners, combines the profits with the dividends it receives from its portfolio and hands the total to us as dividends.<\/p>\n

In addition, some CEFs use leverage to boost returns further. That\u2019s a good tool for management to use (in a reasonable way, of course!), as they can borrow at lower rates than you and I can. The best way to see this in action\u2014and to see exactly how CEF investing can produce lasting wealth\u2014is to look at an example. Let\u2019s do that now.<\/p>\n

An \u201cAll-Star\u201d CEF That Crushes ETFs<\/h2>\n

The Liberty All-Star Equity Fund (USA) <\/strong>is a CEF that gets my attention regularly because of its strong portfolio and track record. With a large-cap US stock focus, USA is a good replacement for a popular S&P 500 index fund like the SPDR S&P 500 ETF Trust (SPY
\n
\n PY
\n <\/fbs-ticker>
\n
\n SPY
\n <\/fbs-ticker>),<\/strong> especially since USA (in orange below) has beaten SPY for a long time.<\/p>\n

USA Outruns the Market<\/strong><\/p>\n

Since May 1, 2017, USA, which uses no leverage, has outperformed the S&P 500 while giving investors a 98.7% total return (or 11.4% annually). That\u2019s ahead of the broader stock market (the purple line above). I\u2019m not pulling that date out of thin air: it\u2019s the first time I wrote about USA for Contrarian Outlook. Back then, I wrote that the fund is \u201ccertainly a better option than passive index investing.\u201d The chart above proves this point.<\/p>\n

Investors who put their money in USA back then have earned $9,873 for every $10,000 invested, while getting $80 per month for each $10,000 invested as dividends. Plus, USA\u2019s payout, which yielded 9.5% when I first recommended it has grown since then.<\/p>\n

USA\u2019s Rising Income Stream<\/strong><\/p>\n

Before we go further, as you can see above, USA\u2019s dividend doesn\u2019t march upward in a straight line. That\u2019s because management\u2019s policy is to pay out 10% of the fund\u2019s net asset value (NAV, or the per-share value of its portfolio) as dividends per year, so the payout tends to float along with NAV.<\/p>\n

Which brings me to another critical aspect of picking CEFs: you need to make sure you\u2019re looking at the right chart to get a clear picture of past performance. And popular screeners, like Yahoo! Finance and Google Finance, just don\u2019t cut it here.<\/p>\n

The Orange Line\u2014Not the Purple\u2014Tells the Real Story of CEF Profits<\/strong><\/p>\n

If you look up USA, or any CEF for that matter, on these screeners, you\u2019ll see the fund\u2019s market-price return by default. That\u2019s the purple line above, which shows a measly 8.7% gain over a six-year period!<\/p>\n

But let\u2019s back up for a second. See the orange line? That includes<\/em> dividends. And USA has paid out about a 10% yield throughout this time period, while delivering an 11.4% annualized total return. In other words, almost all of USA\u2019s profits have been given to investors in the form of cash dividends. And those dividends don\u2019t show up on a stock-price chart.<\/p>\n

To see the profits with dividends included, you need to look at the total-return price<\/em>\u2014a function that\u2019s not available on any free finance website that I\u2019m aware of. But it\u2019s an important number: if we look at USA\u2019s total profits in both dividends and capital gains, we see that the CEF nearly doubled an investment made back in May 2017, in addition to beating the broader market.<\/p>\n

About Those CEF Discounts<\/h2>\n

Now let\u2019s talk discounts, which are critical because CEFs can\u2014and often do\u2014trade at a different level than their portfolio value (these discounts only exist with CEFs, which generally can\u2019t issue new shares to new investors).<\/p>\n

USA\u2019s Closing Discount Boosts Its Market Price<\/strong><\/p>\n

That was another factor in USA\u2019s gain in the past six years: as you can see above, back in May 2017, the fund traded at a roughly 14% discount that\u2019s since narrowed to around 1%. As that discount closed, it supported the share price, allowing investors to collect their double-digit dividends from USA without giving any of that cash back in the form of share-price declines.<\/p>\n

Michael Foster is the Lead Research Analyst for <\/em>Contrarian Outlook<\/em>. For more great income ideas, click here for our latest report \u201c<\/em>Indestructible Income: 5 Bargain Funds with Steady 10.4% Dividends.<\/em>\u201d<\/em><\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

When I talk to investors about closed-end funds (CEFs), I get an almost universal reaction: they simply can\u2019t believe the outsized dividends\u2014and upside potential\u2014these funds boast are for real. I\u2019ll admit, if you\u2019re not familiar with CEFs, their many benefits do sound a bit over the top: a pocket of funds that yield 7.5% on […]<\/p>\n","protected":false},"author":1,"featured_media":12540,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-12539","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nThese 2 'Mystery' Ingredients Can Drive 11%+ Yearly Returns In CEFs | iFintechWorld<\/title>\n<meta name=\"description\" content=\"When I talk to investors about closed-end funds (CEFs), I get an almost universal reaction: they simply can\u2019t believe the outsized dividends\u2014and upside\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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