The next Consumer Price Index (CPI) and Producer Price Index (PPI) numbers drop this week, and the start of earnings season kicks off Friday as big banks are due to report. Any one of those could cause volatility and stop the current bull market in its tracks, especially if earnings disappoint as a whole.
That’s why, even though I’m overall bullish about the market right now, I’m always keeping an eye out for solid income plays to smooth out some of the bumps in the road we’ll get from dips, as well as provide some upside when stocks begin trading higher again.
Anyone who’s been keeping up with my recent watchlists knows how fond I am of closed end funds, or CEFs. In case you’re not familiar with those, they’re a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
CEFs often provide investors with sizeable dividend yields, and the pick on my radar today definitely fits the bill. We’re talking about a massive 17.44% yield at the current price, more than enough to outpace not only inflation, but act as a great hedge against any sudden profit-taking in the broader market. And the fund takes a diversified approach that ensures they aren’t too dependent on any one sector.
Right now, it’s trading at a bit of a premium to its net asset value (NAV), but any kind of pullback will put it in prime territory for dip-buying.
The fund is the Cornerstone Total Return Fund Inc (CRF), a diversified equity closed-end fund with an investment objective of capital appreciation with current income as a secondary objective. The fund adviser uses a balanced approach including both growth and value stocks trading at reasonable prices in a diversity of sectors and industries that demonstrate long term growth characteristics.
CRF may also invest in other closed-end funds, although it caps such investments so that CRF never owns more than 3% of the voting shares of any one investment company.
The top five sectors at the end of 2022 in CRF’s portfolio were: 23.4% information technology, 11.4% other closed-end funds, 11.2% health care, 11.2% financials, and 8.2% consumer discretionary.
And the top five holdings were: Apple Inc (AAPL), Microsoft Corporation (MSFT), Amazon.com Inc. (AMZN), Alphabet Inc – Class C (GOOG), UnitedHealth Group Incorporated (UNH), and Berkshire Hathaway Inc – Class B (BRKB.B).
At the current price, as I said above, the fund delivers a hefty 17.44% yield, but it’s also trading a hefty 20.63% premium to its net asset value (NAV). That’s a steep discount, but with a nearly 18% yield, I’m not surprised.
I’m watching CRF to see if the price can come back down, closer to its NAV. I’m thinking it will start looking attractive once the premium moves below 10%.
Regarding the payout, CRF
…may distribute to stockholders each month a minimum fixed percentage per year of the net asset value or market price per share of its common stock or at least a minimum fixed dollar amount per year. In determining to adopt this policy, the Board of each Fund sought to make regular monthly distributions throughout the year. Under each policy, each Fund’s distributions will consist either of (1) earnings, (2) capital gains, or (3) return-of-capital, or some combination of one or more of these categories. A return-of-capital is the return of a portion of the stockholder’s original investment.
Given the current economic environment and the composition of each Fund’s portfolio, a substantial portion of each Fund’s distributions made during the current calendar year is expected to consist of a return of the stockholder’s capital”.
Before you invest in CRF for the massive yield, make sure you’re comfortable with the CRF’s distribution policy. You can find everything you need to know about the fund at this link.
Keep an eye out as we look forward to the CPI and PPI reports this week and break down strategies for the upcoming earnings season.
— Shah Gilani
Source: Money Morning