Income – pretty much everyone wants it… but not many people know how to get it. The search for income continues to rank right up there on the list of investors’ concerns.
Rates are on the verge of rising, it’s true, but we’re starting from close to zero; it could be years before rates reach levels that allow the income-starved masses to even consider using Treasuries or bank products to provide the kind of cash needed to turn dreams into reality.
The dramatic, post-“COVID Crash” rally in stocks and other risk-based assets is cold comfort – it’s actually made dividend-paying stocks and real estate investment trusts (REITs) less attractive. Why? Collecting a 3% payout while exposed to the possibility of a 20%-or-better decline is not an attractive risk/reward proposition for income investors.
But I’ve been in the markets for decades – been around the block a few times. I love income as much as the next guy. The truth is, great income-generating investments are out there for the having, even in this environment.
They’re not “sexy,” and you probably won’t catch the tickers flying around on the front page of Reddit, but they can seriously boost your income and offer you some diversification across a wide range of asset classes and strategies.
Here’s the deal…
Why I Love Closed-End Funds for Income
These are almost always overlooked, but with just two clicks of the “Buy” button, you can own growth stocks, blue chips, value stocks, municipal bonds, REITs, senior secured floating rate loans, high-yield bonds, government bonds, infrastructure assets, and just about anything else that you can imagine… but don’t often see hyped online.
That said, the tickers I’m going to share with you in a second are closed-end funds (CEFs) that invest in other closed-end funds. Aggressive, “activist” management is an added benefit here. They’ve been working to force profitable changes, as activist investors will do, but the management of both these particular funds engage in what’s called “closed-end fund arbitrage.”
That means they take positions in closed-end funds that trade at significant discounts to net asset value (NAV) and collect the generous dividend payments closed-end funds usually provide until reversion of the mean narrows the discount.
Closed-end funds trade at a discount because the shares trade on a stock exchange just like a share of stock. To redeem investors, management has to sell shares on the market rather than back to the fund itself. Once the IPO of the fund is complete, brokers have no incentive to market the fund, so the shares will often fall to a discount to the value of the stocks and bonds they own.
That’s where the managers of the two funds I’m about to name usually enter the picture…
Activists will then force the fund managers to take steps to narrow the discount. For example, they will buy a significant stake in funds with large discounts and threaten management with a proxy fight or takeover to force them to buy back stock, have a tender offer, or convert to an open-end fund and eliminate the discount.
These managers aren’t bluffing when it comes to the threats. Both of these income-producing opportunities exist because the manager took over a former activist target and redirected the investment strategy.
Buy These Now… and Get Income Each Month
My first pick is the Special Opportunities Fund Inc. (NYSE: SPE). This fund is managed by Phillip Goldstein, a former engineer for the city of New York. Being mathematically inclined, Mr. Goldstein found the math of closed-end fund arbitrage investing very attractive. At a closed-end investing conference in New York, he met a broker who was also interested in closed-end fund investing strategies. The two became friends and eventually partners and started a firm they called Bulldog Investors – the name says a lot about their strategy.
Today, Bulldog is one of the better-known and longest-tenured closed-end fund activists and has an outstanding track record of success.
SPE shares trade at a slight discount to net asset value, the current yield is about 8.5%, and dividends are paid monthly.
The second fund is the Saba Capital Income & Opportunities Fund (NYSE: BRW). Saba Capital is run by Boaz Weinstein, who has to be considered among the best fixed-income investors in the world today.
Weinstein tries to stay out of the public eye, but there’s no hiding the fact that he was the first person to spot the unusual trading patterns of Bruno Iksil – the “London Whale” himself – back in 2012. Weinstein actually took the other side of the Whale’s fixed-income trades that ultimately cost JPMorgan Chase more than $6 billion.
Sometimes it’s hard to keep a low profile, no matter how hard you try. Back in 2019, Weinstein noticed credit default swaps – an instrument that allows you to bet against a company’s credit condition – were priced incorrectly. Bets on companies with risky credit were trading at about the same price as bets against rock-solid companies.
What did he do? He bought swaps on the crummy companies and sold contracts on the sound ones. When the “COVID Crash” tanked stocks in mid-March, 2020, his funds jumped higher by more than 100% when the bad swaps skyrocketed.
Mr. Weinstein has been very active in closed-end funds as well. He has taken several activist positions and waged successful campaigns to “narrow the discount.” This fund itself was an activist target that Mr. Weinstein’s team ended up taking over management of last year.
While the fund will have closed-end funds as a central focus, if Boaz Weinstein sees opportunities for big profits as he saw in 2012 and 2019, he can implement these strategies in his closed-end fund.
This fund trades at a discount of less than 5% and is currently yielding a little over 12%. Dividends on the Saba Capital fund are also paid monthly. It’s tough to beat closed-end funds like this for yield and instant global diversification.
It’s tough to beat the prices here, too. Although, by definition, they’re worth more, BRW trades for just $4.57, and SPE for just $15 right now.
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Source: Money Morning