Investing

How to Capture a Fat Stream of Dividends with CEFs

By Charles Sizemore  |  April 22, 2019

Growing up in the Dallas suburbs, I wasn’t exposed to livestock the way rural Texans were. People invested far too much money manicuring their lawns to allow farm animals onto them — especially goats.

But my old college roommate, Mike, found a creative way to turn an expense into a sellable asset involving goats, spurred on by his grandfather.

Mike’s grandfather refurbished and repaired appliances. And Mike was responsible for making sure the grass was mowed around the shop. But who in their right mind wants to mow the lawn in Texas, where it can be well over 100 degrees throughout the summer?

Well, Mike found a solution. He went to the flea market, bought two baby goats, and set them free in the yard. Goats being goats, they chewed the grass down to nothing and got fat in the process.

After several weeks, Mike had older, fatter goats that were now worth more than what he had paid for them. So he took them back to the flea market and resold them at a higher price. Two weeks later, when the grass got long again, he bought two new baby goats.

Rinse and Repeat

I don’t recommend buying goat shares in Peak Income. But like Mike’s goats, I do look for investment strategies that are simple and repeatable.

Take closed-end funds (CEFs) as an example. They normally trade at a small discount to net asset value (NAV) of something like 1% to 5%. And when they trade at those prices, they’re often decent income investments.

You shouldn’t expect much in the way of capital gains, but the yields are generally high enough to keep it interesting.

But every now and then, investors panic and dump their CEF shares, causing the discounts to NAV to blow out. It’s not uncommon to see discounts of 10% to 15%, meaning investors are getting a dollar’s worth of bonds and other assets for just 85 to 90 cents. And I’ve seen the discounts get even wider than that.

When I see CEFs on sale like that, I buy as many as I can. I collect a fat stream of dividends (sometimes higher than 10%) while I wait for prices to return to “normal.” If done right, it’s a low-risk, high-return strategy. And if experience has taught me anything, it’s infinitely repeatable.

So long as CEFs exist and are owned primarily by unsophisticated retail investors, these kinds of opportunities will periodically present themselves.

In December and January, I recommended six closed-end bond funds in Peak Income. Remember, these are bond funds, not stock funds. These are supposed to be stodgy, fuddy-duddy investments.

Well, my readers are up an average of 11% since my initial recommends… in bonds. And I see a lot more upside to come.

Most CEFs aren’t quite the fat pitch they were at the beginning of this year. But there’s still a lot of value in that space, and CEFs are just one of many places I go to fish for quality income investments.

It’s a simple, repeatable income investment, just like Mike’s goats.

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Charles Sizemore

Income and Retirement Strategist, Charles Sizemore, CFA specializes on dividend-focused portfolios and building alternative allocations by finding value opportunities outside of the mainstream stock market.

Charles is the executive editor and portfolio manager for Dent Research's premium newsletters, Peak Income and Peak Profits.

He is also a frequent guest on CNBC, Bloomberg TV, Fox Business News and Straight Talk Money Radio, and has been quoted in Barron’s Magazine, The Wall Street Journal, and The Washington Post. He is a frequent contributor to Forbes, GuruFocus, MarketWatch and InvestorPlace.com.

Charles holds a master’s degree in Finance and Accounting from the London School of Economics in the United Kingdom and a Bachelor of Business Administration in Finance with an International Emphasis from Texas Christian University in Fort Worth, Texas, where he graduated Magna Cum Laude and as a Phi Beta Kappa scholar. MORE FROM AUTHOR