{"id":83997,"date":"2023-11-13T12:06:35","date_gmt":"2023-11-13T17:06:35","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/this-unusual-market-lag-has-put-our-top-8-dividends-on-sale\/"},"modified":"2023-11-13T12:06:39","modified_gmt":"2023-11-13T17:06:39","slug":"this-unusual-market-lag-has-put-our-top-8-dividends-on-sale","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=83997","title":{"rendered":"This Unusual Market Lag Has Put Our Top 8%+ Dividends On Sale"},"content":{"rendered":"
\n

We\u2019ve got clear proof that our favorite income funds\u2014closed-end funds (CEFs), which yield 8% and up\u2014are still well behind the rise we\u2019ve seen in the S&P 500, and set to make up that ground.<\/p>\n

While I can\u2019t tell you exactly when <\/em>that bounce will happen, we\u2019re going to dive into the reasons why it\u2019s very likely today. And, anyway, timing doesn\u2019t matter too <\/em>much to us at CEF Insider<\/em> because we\u2019re happy to use this time to buy our portfolio\u2019s high dividends, which yield up to 13.7% as I write this.<\/p>\n

The \u201cScared Retail Investor Lag Effect\u201d and Our CEFs<\/h2>\n

Sadly \u201cSRILE\u201d doesn\u2019t sound too appealing as an acronym, so I don\u2019t think I\u2019ll become famous for inventing it. But it sets up an important idea: that market recoveries have three psychological stages:<\/p>\n

    \n
  1. Start of the recovery:<\/strong> Hedge funds close out short positions and shift to long positions on the most oversold stocks. They did this at a noticeable scale in February 2023, according to Bloomberg; this is followed by more conservative funds: banks, value-focused mutual funds, insurance companies and so on.<\/li>\n
  2. The setback:<\/strong> A \u201cbull trap\u201d typically appears and is exacerbated because of recency bias, overblowing one event\u2014we discussed this regularly back when Silicon Valley Bank imploded and failed to take the world down with it, despite what most sources were saying at the time.<\/li>\n
  3. The return to a bull market:<\/strong> Retail investors give up on their pessimism and get back into stocks.<\/li>\n<\/ol>\n

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

    That third step is something we at CEF Insider<\/em> expected to happen in early 2023, but it hasn\u2019t occurred yet.<\/p>\n

    Not only have discounts across all CEFs grown from 6.7% to 8.2% this year, but the gap between the current average discount and the long-term average has nearly tripled. In other words, when the discount rises to its long-term average, investors who bought today could sell CEFs they bought at a discount for a premium.<\/p>\n

    There are now lots of opportunities to ride these closing discounts to gains in CEFs.<\/p>\n

    We don\u2019t have to go far to see this in action: On November 2, we discussed the PIMCO Dynamic Income Fund (PDI)<\/strong>. The discount to net asset value (NAV) on this corporate-bond fund, which was in the process of closing when I wrote that piece (and was around par when the article was published) was offering upside as it narrowed, in addition to a 16.2% dividend.<\/p>\n

    PDI soared to a 7.9% premium from a near-3% discount in just the last few weeks, pushing up its price before investors had time to collect a single dividend!<\/p>\n

    This isn\u2019t hard to predict. For over a decade, the sector of bond\/fixed-income CEFs has had a range-bound discount of around 4%, while PDI\u2019s average premium has been much higher, mostly due to the fact that PIMCO is a storied name in CEFs.<\/p>\n

    This makes our strategy obvious: buy PDI when the premium falls low (I\u2019d say below 1%, give or take) and sell when it gets a little too high (this really depends on your risk appetite). Along the way, you\u2019re getting the fund\u2019s big income stream and capital gains as its premium reverts to the mean.<\/p>\n

    Profiting from CEF Discounts: Now Is the Time<\/h2>\n

    The prolonged slowness of retail investors to move back into CEFs has caused discounts to get unusually big for a longer time, meaning there are a lot more CEFs you can buy when their discounts get too big, hold and collect income, then sell when the discount narrows or flips to a premium.<\/p>\n

    Going into 2023, CEFs already had compelling yields, with nearly 90 funds in the 8% to 10% range, and nearly all of those discounted to some extent.<\/p>\n

    CEFs have begun yielding more for two reasons. One, higher bond yields have made it easier to maintain payouts, ending the dividend cuts that inferior bond CEFs have been plagued with.<\/p>\n

    Another reason is that higher discounts make dividends easier to maintain and grow. This is because the yield we see for a CEF online\u2014or the yield we get, in other words\u2014is calculated based on the fund\u2019s discounted market price,<\/em> while the yield on NAV, or the yield as calculated on the fund\u2019s actual value<\/em>, is lower. This is the yield that management has to get to sustain the fund\u2019s payout.<\/p>\n

    In a nutshell, the bigger the discount, the less a fund needs to earn to cover the dividend.<\/p>\n

    I\u2019ve seen this happen before, both with CEFs in general and PDI in particular.<\/p>\n

    In 2016, the same thing happened to PDI for the same reasons as today: rising interest rates, fear of inflation and fear of a recession kept retail investors away. If you bought PDI when those investors were bearish and it swung to a discount in 2016, you got a 27.8% return in just a year and two weeks, if you waited for PDI to swing to a premium.<\/p>\n

    This wasn\u2019t just a way to make a big profit in a short time\u2014it also offered a reliable, outsized income stream that, thanks to a big special dividend, meant PDI yielded a whopping 14.6% during this holding period.<\/p>\n

    PDI is poised for a similar performance in the short-term, but as we saw, it does trade at a 7.9% premium as of the time of this writing. However, there are other CEFs offering similar setups. And since CEFs offer 8.1% dividends on average, you\u2019ll be getting a huge income stream while you wait for the market to right itself.<\/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 10.9% 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":"

    We\u2019ve got clear proof that our favorite income funds\u2014closed-end funds (CEFs), which yield 8% and up\u2014are still well behind the rise we\u2019ve seen in the S&P 500, and set to make up that ground. While I can\u2019t tell you exactly when that bounce will happen, we\u2019re going to dive into the reasons why it\u2019s very […]<\/p>\n","protected":false},"author":1,"featured_media":83998,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-83997","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nThis Unusual Market Lag Has Put Our Top 8%+ Dividends On Sale | iFintechWorld<\/title>\n<meta name=\"description\" content=\"We\u2019ve got clear proof that our favorite income funds\u2014closed-end funds (CEFs), which yield 8% and up\u2014are still well behind the rise we\u2019ve seen in the\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=83997\" 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