2 “Double-Discounted” Funds Paying 8.7%+ Dividends Monthly

My indicators are pointing to one thing right now: higher stock prices, with new all-time highs next year. So this is a great time to lock in some fresh 8%+ payouts—before their prices race away from us!

But wait a minute. The economy stinks and our political process seems more dysfunctional than ever. So why would stocks climb from here?

Money Printer Goes Brrrrr…

The answer lies with Fed Chair Jay Powell’s printing press monetary policy. Since March, he’s been flooding the economy with liquidity. Other central banks around the world have been generous, too.

We both know that printing buckets of money is a recipe for higher inflation. And in the long run, I think that’s where we’re headed. So what’s a dividend investor to do?

We’re going to work this weird setup to our advantage, setting ourselves up for the three things all dividend investors want:

  • 8.6%+ dividend payouts, often paid monthly.
  • Market-beating returns.
  • A downside hedge, for the next time stocks take a header.
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We’ll pull off this trifecta by employing a “double-discount” mechanism to purchase shares for as little as $0.86 on the dollar.

This strategy is an ode to my mom, who—to this day—refuses to pay the sticker price for anything. If there’s a coupon to be found, she’ll not only find it but she’ll find another coupon to secure a double discount, and then demand to speak to the store manager if an unfortunate clerk gets in her way.

The dividend equivalent of the back-to-back coupon is buying a discounted closed-end fund (CEF) after a pullback. Let’s dive into how this works and look at two specific names we’ll use to put this strategy to work.

CEFs: Buy, Ride the Closing Discount, Repeat

CEFs are the perfect way to pick up great assets cheap because many of these funds trade at attractive discounts to net asset value (NAV, or the value of the shares in their portfolios).

The key to generating upside in CEFs is simple: buy funds at a big discount, then watch as that discount bubbles away—and propels the stock price higher.

Here’s a real-world scenario: I recommended the Cohen & Steers Income Fund (UTF) to my Contrarian Income Report subscribers in May 2016. At the time, it yielded an outsized 10.8% and traded at a ridiculous 15% discount to NAV. By December 2019, that discount had narrowed to just 4%, so we sold, taking 75% in gains and dividends with us, and clobbering the S&P 500, too!

Not bad for a fund that holds mostly “boring” utilities like Enbridge ENB (ENB), NextEra Energy (NEE NEE ) and Duke Energy DUK (DUK)! It’s a textbook example of the power of a closing CEF discount.

This is where Mom’s “double discount” comes in, because we can set ourselves up for even more upside by picking up CEFs that trade at a discount and invest in undervalued corners of the market.

And for that, we’re going to focus on funds that hold high-yield real estate investment trusts (REITs). REITs—which own (and rent out) everything from senior-care centers to cell towers—have underperformed this year, mainly because some REIT sectors, like shopping malls, have been hammered by COVID-19.

But what many folks overlook is that for every losing REIT, like shopping-mall owner Simon Property Group SPG (SPG), there’s one like STAG Industrial (STAG), whose warehouses are packed due to the online-shopping binge. Cell-tower owners, like American Tower (AMT) and Crown Castle (CCI), are also profiting as we rely on our iPhones and tablets more than ever.

Here are two REIT CEFs to put on your list. We’ll go into detail on each below.

REIT CEF No. 1: Cohen & Steers Quality Income Realty Fund (RQI)

RQI is set up for a socially distanced world, with a focus on infrastructure REITs—American Tower and Crown Castle are both top-10 holdings—as well as data centers, like Equinix EQIX (EQIX), and warehouse owners, like Duke Realty (DUK), whose top tenant is Amazon.com (AMZN) itself.

The fund’s well-managed portfolio has delivered a 196% total return in the last decade, easily besting the 123% return on the REIT benchmark Vanguard Real Estate ETF (VNQ) VNQ . It’s also powered RQI’s dividend right through this crisis.

A “Crisis-Resistant” Monthly Payout

So you’re getting outperformance, upside potential and a steady 8.6% monthly dividend here. The fact that this fund is available for 90 cents on the dollar just shows you how inefficient (in a good way!) the CEF market is.

REIT CEF No. 2: Aberdeen Global Premier Properties Fund (AWP)

AWP gives us international diversification but still with a solid foothold (52% of its holdings) in the US. And many of its US REITs are seeing stronger demand during COVID-19, including warehouse operator Prologis PLD (PLD) and laboratory owner Alexandria Real Estate Equities (ARE).

As I wrote in my recent article “2 ‘Tollbooth’ Dividends Growing Payouts 135%+,” Alexandria’s tenants are almost all involved in COVID-19 research and include leading pharma and medical-device makers like Pfizer PFE (PFE), Abbott Laboratories ABT (ABT) and Thermo-Fisher Scientific (TMO). 

The kicker: AWP’s huge 14.6% discount actually makes its dividend safer. That’s because management only has to earn the yield on NAV, not the yield on the discounted market price, to cover the payout. And thanks to AWP’s wide discount, its yield on NAV is just 8.5%, well below its 10% yield on market price.

With the average REIT yielding around 4% now, that leaves management to come up with 4.5% in price gains from its portfolio. That shouldn’t be a problem, given the (overly) washed-out REIT market.

And AWP has another trick up its sleeve: it could boost its leverage, which is 7.7% of the portfolio, a very low ratio for a CEF. Doing so would be a particularly savvy way to juice the fund’ upside in these zero-interest-rate times.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

Disclosure: none

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