{"id":51538,"date":"2023-08-22T09:29:39","date_gmt":"2023-08-22T13:29:39","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/2-clicks-to-convert-soaring-interest-rates-into-soaring-dividends\/"},"modified":"2023-08-22T09:29:42","modified_gmt":"2023-08-22T13:29:42","slug":"2-clicks-to-convert-soaring-interest-rates-into-soaring-dividends","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=51538","title":{"rendered":"2 Clicks To ‘Convert’ Soaring Interest Rates Into Soaring Dividends"},"content":{"rendered":"
\n

It\u2019s prime time to grab two bond funds tossing out 8%+ dividends now\u2014and we have the Fed (of all things!) to thank for this opportunity.<\/p>\n

Last year, as we all know (too well), the Fed raised interest rates at the fastest pace in history, bringing them to their highest point in nearly 20 years. As a result, many corporate bonds (represented by the red line above) are yielding a lot<\/em> more than they used to.<\/p>\n

Take, for instance, two bonds from Apple
\n
\n AAPL
\n <\/fbs-ticker> (AAPL),<\/strong> one issued in August 2020 (when the world looked a lot more precarious than it does today, as we still had an unresolved pandemic worldwide) and one issued in May 2023. The CUSIP numbers for these are 037833DX5 and 037833EW6 respectively; any broker can look them up for you.<\/p>\n

The 2020 issue yields 0.55%, while the newer one yields a whopping 4.85%.<\/em><\/p>\n

In other words, if you bought a million dollars\u2019 worth of the 2020 Apple bond, you\u2019d have gotten $458 per month in interest. If you\u2019d bought the bond issued in May 2023, you would be getting a $4,042 monthly income stream!<\/p>\n

Trouble is, buying individual bonds (even from Apple) is difficult for individual investors. But that difficulty fades away when you buy your bonds through my favorite high-yield investments: closed-end funds (CEFs).<\/p>\n

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

There are a couple of reasons for this. For one, we don\u2019t need CUSIPs or other more-obscure identifiers to look these CEFs up, as they trade on public markets, just like stock or ETFs.<\/p>\n

Second, when we buy through a CEF, we \u201cfarm out\u201d our bond picks to a pro. The folks who run the two CEFs we\u2019ll discuss in a second, for example, have deep connections and long experience in bond-land, as well as easy access to the best new issues. That\u2019s key to success in the bond market, which is much smaller than the stock market.<\/p>\n

Not all bond funds are made the same, though. You want a fund with a lot of long-term bonds that is paying a juicy yield but isn\u2019t<\/em> doing so by investing in profitless startups or firms whose businesses are fading into obscurity.<\/p>\n

Truth is, there are a lot of CEFs focusing on bonds (CEFs focusing on bonds of various types, as well as bond-like preferred stocks, make up around half of the 500 or so CEFs out there). And as is the case with stocks, mutual funds or pretty well any other asset class, not all of these CEFs are worth investing in\u2014some are dogs, taking on too much risk, suffering from poor management or trading at overcooked valuations.<\/p>\n

Fortunately, there\u2019s also a good selection of strong, cheap, high-yielding bond CEFs out there, as well. Here are two, the first of which is a recommendation of my CEF Insider<\/em> advisory. The second is a fund we\u2019ve got our eye on but isn\u2019t currently in our portfolio.<\/p>\n

Corporate-Bond CEF No. 1: A 9.3% Payout Backed By Well-Established Firms<\/h2>\n

Our first pick is the Western Asset High Income Opportunities Fund (HIO),<\/strong> whose 9.3% yield is compelling because its managers actually have to earn much less than that to keep the fund\u2019s dividend rolling out.<\/p>\n

That\u2019s because HIO trades at what in CEF-land is called a \u201cdiscount to NAV\u201d (net asset value, or the value of the assets in a fund\u2019s portfolio). In HIO\u2019s case, that discount comes in at 9.8%. And because management only needs to cover the fund\u2019s yield on NAV<\/em> (not the yield on the discounted market price), it only needs to earn 8.4% to keep that 9.8% payout flowing our way.<\/p>\n

Here\u2019s the kicker: now that the average corporate-bond yield is 8.3%, targeting that return has gotten quite easy, indeed.<\/p>\n

As you can see by the orange line above, HIO has done a great job of beating the corporate-bond benchmark since early 2008 and<\/em> providing a solid yield, even through the early- to mid-2010s, when interest rates were basically pegged at zero. But after rates went up from 2016 to 2019, HIO\u2019s (monthly paid) dividend started growing, to the tune of a 34% increase over the last five years.<\/p>\n

That dividend is backed by bonds from strong companies like investment manager Voya Financial, Kinder Morgan
\n KMI
\n <\/fbs-ticker>, Carnival Cruise Lines, Delta Air Lines
\n DAL
\n <\/fbs-ticker> and Teva Pharmaceutical Industries. These aren\u2019t crypto firms or profitless startups; they\u2019re real companies with decades of history and strong cash flows.<\/p>\n

And since bond yields are high and set to stay high for much longer than they did before going back to zero in 2020, HIO\u2019s dividend hikes are likely just getting started. The market hasn\u2019t priced this in yet, which is why the fund is still available at nearly 10% off its market price.<\/p>\n

Corporate Bond CEF No. 2: A 10.2% Dividend Built on a \u201cPiece of the Rock\u201d<\/h2>\n

Next, let\u2019s look to the Prudential Short Duration High Yield Fund (ISD)<\/strong>, which has a similar 9.6% discount but yields even more: 10.2%. Can this income stream be sustainable?<\/p>\n

As is the case with HIO, ISD\u2019s main holdings are bonds from big firms like United Rentals
\n URI
\n <\/fbs-ticker>, Pilgrim\u2019s Pride, Voya and Tenet Healthcare
\n THC
\n <\/fbs-ticker>.<\/p>\n

ISD has a strong track record of finding underpriced high-quality bonds from firms with a solid cash flow. This should surprise no one; ISD\u2019s management firm, PGIM Fixed Income, has ties to Prudential\u2014the insurance firm you may remember from its cheeky \u201cGet a piece of the rock\u201d ad campaign in the 1970s.<\/p>\n

Prudential, of course, has decades of experience in the insurance business, making it ideal for identifying risk and extending credit to the right companies. This has also helped ISD return more than the benchmark high-yield bond index in the last decade:<\/p>\n

The thing to remember here, too, is that due to its high dividend (its current yield is 10.2%), ISD has delivered more of this return as dividend cash than holders of the ETF (current yield: 6.5%) would have received. And ISD\u2019s payout has held up nicely!<\/p>\n

Higher interest rates in the late 2010s again helped drive ISD dividends up, but the even higher payouts from 2022\u2019s sharp rate hikes have not shown up in the fund\u2019s payouts\u2014yet. When they do, ISD\u2019s 9.6% discount will likely vanish.<\/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":"

It\u2019s prime time to grab two bond funds tossing out 8%+ dividends now\u2014and we have the Fed (of all things!) to thank for this opportunity. Last year, as we all know (too well), the Fed raised interest rates at the fastest pace in history, bringing them to their highest point in nearly 20 years. As […]<\/p>\n","protected":false},"author":1,"featured_media":51539,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-51538","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\n2 Clicks To 'Convert' Soaring Interest Rates Into Soaring Dividends | iFintechWorld<\/title>\n<meta name=\"description\" content=\"It\u2019s prime time to grab two bond funds tossing out 8%+ dividends now\u2014and we have the Fed (of all things!) to thank for this opportunity. 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