Every legendary investor worth their salt has some sort of phrase to describe what investors should be doing right this very minute.
“Be fearful when others are greedy, be greedy when others are fearful.”
“Buy when there’s blood in the streets.”
Largely speaking, most stocks on the market are on sale to some extent. And sure, we could go out and make a few targeted bets on these bargains.
But I’d prefer to squeeze even more value out of the stock market.
Enter closed-end funds (CEFs). Why CEFs Are Our Best Option Now
If we were to go out and buy an exchange-traded fund (ETF) that invests in, say, the NASDAQ Composite or Russell 2000 , or really any area of the market you felt was underpriced, you’d be able to enjoy in the collective discounts of all their holdings. No more, no less.
But with CEFs , we can do even better.
My mom, to this day, refuses to pay the sticker price. If there’s a coupon to be found, she’ll not only find it, but she’ll also find another coupon to secure a double-discount (even if it requires management approval to apply)!
And just like my mom, we can secure a double-discount by investing through closed-end funds.
You see, unlike ETFs, which can create and destroy as many shares as needed to meet market demand, CEFs go public with a specific number of units, and that number doesn’t really change over time.
Because of that, CEFs’ net asset value can become untethered from the value of its holdings. Sometimes, that NAV can be worth significantly more, in which case the closed-end fund will trade at a premium, say $1.05 for every $1 in holdings.
But sometimes, you get the better other edge of that sword, and buy a CEF at a discount to NAV, paying, say, 95 cents for every $1 in holdings.
When you combine that with a broader market that’s already on sale, we contrarians can take a page out of my mom’s playbook and get a double-discount that, in the case of the five funds that I’m about to show you, can allow us to purchase shares for as little as 81 cents on the dollar!
Let me introduce you to five CEFs that will allow you to do exactly that. And in addition to trading at a significant discount (of 10% or more), these funds offer fat yields of 7% and more—and better still, pay out their distributions each and every month .
We’ll start out with a fund that’s actually doing quite well this year: 1. First Trust MLP And Income Closed Fund – 7.7% yield
Energy has been the market’s hottest sector in 2022, and it’s not even close. The sector is up 38% so far—and it’s the only one in positive territory! Second-best is utilities with “just” a 1% decline.
That said, energy-infrastructure master limited partnerships (MLPs) haven’t been quite as explosive. First Trust’s, for instance, is up just 7%, which is far behind the broader energy sector and only half as good as most indexed MLP exchange-traded funds.
Oil Prices Are Flying, But FEI Is Just Hovering a Little FEI Performance Conversely, FEI might be one of the only energy-sector bargains left.First Trust MLP & Income Closed Fund (NYSE: FEI ) is a tight, concentrated portfolio of infrastructure plays primarily dealing in petroleum, natural gas , electric power and crude oil transmission.Industry blue chips such as Enterprise Products Partners LP (NYSE: EPD ) and Magellan Midstream Partners LP (NYSE: MMP ) anchor the top holdings list. That naturally would lead to a high overall yield, but about 20% in debt leverage helps FEI juice its payout to nearly 8% at current prices.Value investors will love that they’re getting twice the bargain right now, at a discount to NAV of 14%, which is double the CEF’s five-year historical discount of about 7%.You can find a couple more double-digit discounts to NAV in the following CEFs: 2. & 3. Neuberger Berman Next Generation Connectivity Fund – 11.4% Yield; MainStay CBRE Global Infrastructure Megatrends Fund – 7.7% Yield The first thing that stands out? These aren’t traditional CEFs. Neuberger Berman’s NBXG looks for stocks with growth potential from “the development, advancement, use or sale of products, processes or services related to the fifth-generation mobile network and future generations of mobile network connectivity and technology.” In other words, 5G stocks. NVIDIA (NASDAQ: NVDA ). Palo Alto Networks (NASDAQ: PANW ), and Globant (NYSE: GLOB ). MainStay’s MEGI is a little less straightforward. The firm says its fund […]
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