5 Stocks For 2016 With 6%+ Dividends & 10%+ Upside

Brett Owens, Chief Investment Strategist
Updated: December 30, 2015

Most “first-level investors” spent the holiday season dumping any and all fixed income holdings like expired eggnog. The Fed rate hike got in their heads, and in their panic they tossed some perfectly good funds in the return bin.

Many closed-end funds are now trading at double-digit discounts to their net asset values (NAVs). Doubleline Capital founder and famed bond guru Jeffrey Gundlach recently told CNBC that buying a fund trading at a 15-20% discount is “sort of a no-brainer.”

Reason being, you’re getting $1 worth of assets for just 80 or 85 cents. That’s free money for us calculated second-level thinkers. All we need to do to collect it is buy these issues on sale, wait for the discount to close, and collect monthly yields of 0.5% or better while we wait.

Of course there’s no guarantee that a cheap fund won’t get cheaper in the short term. But over time, the market will normalize and discounted funds will see their prices trend up towards their underlying NAVs. Fund managers can even force the appreciation by buying back their own shares.

I love watching these closed-end fund discounts because they’re clear contrarian indicators. The more investors dislike a strategy at the moment, the greater the discount they demand. The irony being that most people love chasing recent performance, which means they’re most inclined to sell a loser at the moment it’s most likely to turn around.

Another good thing about closed-end funds is that their pool of investors – and hence capital – is actually fixed. An open-end fund issues as many shares as investors want to buy. That’s great until investors decide they want out, and the manager must sell perfectly good positions for cheap to cash out fleeing shareholders.

Closed-end fund investors, on the other hand, have to sell their shares to someone else on the way out. So, these managers don’t have to worry about a capital crunch. They’ve got a set pool of money thanks to the public markets, and they can sit tight on their positions through any panic.

5 Funds With 6-10% Yields and 10-15% Upside

Looking for some contrarian income today? Here are five closed-end funds with 6% yields or better, with double-digit upside to boot thanks to their current discounts. Let’s review them from cheap, to cheapest…

The Nuveen Municipal Opportunity Fund (NIO) is a nice way to capitalize on the periodic panic that engulfs the municipal bond market. “Muni bonds” are issued by states, cities, and counties to raise money for capital projects (like public transportation and infrastructure improvements).

The fund sells for a 10.8% discount to NAV today, and pays a 6.2% annual dividend that’s distributed monthly. It’s rarely this cheap:

NIO Is Rarely This Cheap

NIO-NAV-Chart
The BlackRock Corporate High Yield Fund (HYT) is a direct way to make a contrarian play on the recent free-fall in high yield. It’s a 4-star Morningstar fund with an 11.4% discount to NAV – about as steep as there’s ever been since the fund’s 2003 inception.

HYT owns debt issued by companies such as Ally Financial, HD Supply, and First Data. It pays a monthly dividend that adds up to an 8.4% annual yield.

The Calamos Strategic Total Return Fund (CSQ) invests in common stock, corporate bonds, and convertible bonds. It pays a juicy 10% annual dividend and sells at an 11.8% discount to NAV.

My problem with CSQ is its high allocation (59%) to common stocks. When stocks got crushed in 2008, the fund saw its NAV fall by 45%. The next time equities see a bear market, this fund is going to follow them south.

That’s why I like to see a little more “alpha” from my closed-end fund managers. The BlackRock Enhanced Equity Dividend Trust (BDJ) fits the bill from a strategy perspective. It buys dividend payers and sells covered call options on its holdings to generate additional income.

In doing so, BDJ is giving up the upside of a stock rally (because its shares will be “called” away). But in return, it will receive a bit of capital appreciation, the dividends, and the income from the call options it writes.

The net result is a portfolio that yields 7.8% annually. After fees, the fund pays 7.4% to investors. It sells at a 12.8% discount to NAV today.

Finally you can buy your own virtual toll bridge with the Cohen & Steers Infrastructure Fund (UTF).  It invests in infrastructure companies that own and operate utilities, airports, toll roads, railroads, and other physical framework.

Since inception 11 years ago, UTF has returned 7.8% annually to investors, outpacing the S&P 500’s 7% gain. It will likely outperform in the years ahead thanks to its current 8.7% yield and 16% discount to NAV.

Before You Buy, Verify The “No-Brainer”

Sometimes cheap funds are “cheap for a reason.” Do your homework, and make sure you know what issues a fund holds before you buy it. Also be sure to research management’s track record and current strategy – they’re the ones pulling the strings.

Otherwise, you might end up with a fund like CSQ that delivers yield and looks great – until a bear market hits and you lose 40% or more!

If that sounds like a lot of work, don’t worry about it. I’m wrapping up my research in the next edition of the Contrarian Income Report as we speak. I’ll highlight my favorite closed-end fund for you to buy right now. We’ll also review the best bargains in our current portfolio.

If you’re not yet a subscriber, and you’d like to receive my favorite high yield picks immediately (which pay an average of 7.1%), you can learn more right here.