As a mostly income-oriented investor now that I have reached retirement age, I am constantly on the lookout for closed-end funds and ETFs that pay a regular high-yield income stream, which I use to compound my returns over time in my Income Compounder portfolio. As such, I am far more interested in the amount of income that my investments provide to me each month than I am concerned with the price or the total “value” of my holdings. When you hear some people say that you need at least X amount of money to survive in retirement, they are making assumptions about a lot of things they may not know including how much you will be spending, how much your investments return, what is the risk to your future income, etc. In my personal situation, as long as my income from my investments exceeds the amount that I plan to spend each month and my future income stream continues to grow, I expect to be in good financial shape in retirement.
With income investing you do not need to make two correct guesses to make money like you must with growth or value stocks (i.e., buy low, sell high at the right time). You only need to pick a horse that will finish the race, not necessarily the one that will win it. Growth or value investors are constantly trying to determine which companies will succeed with higher interest rates for longer, or lower interest rates later this year if the Fed decides to cut. While many try to pile into growth stocks with momentum like Nvidia, Amazon, or Tesla, income investors only need to buy stocks or funds that will continue to pay a steady distribution, in some cases every month.
Also, because I have additional sources of income (e.g. pension, part-time employment, Social Security) in addition to my investing income, I like to take on a bit more risk than the average, more conservative investor. In this review of four closed end funds that I own, I would like to share with you why I am enjoying receiving a very high-yield income stream from them and expect it to continue and even grow in the months ahead.
Because these funds all offer a very high distribution yield that exceeds 15% in each case and as much as 18%, many other SA analysts and authors write disparaging articles about them or warn investors to “stay away”. Danger, Will Robinson, they say! Often, investors see a high-yield distribution and immediately see warning signs flashing red. It is not my intent to flagrantly promote any investment simply because it offers a high-yield, but if it does offer high-yield income and the risk to that high-yield is relatively low with respect to future distributions, I am all for it. As my namesake was famously quoted as saying:
“The race is not always to the swift, nor the battle to the strong, but that's how the smart money bets.” ― Damon Runyon
Given that introduction, here are four CEFs that I currently own, enjoy a nice monthly income from holding them, and reinvest at least 50% of the distributions into more shares of these and other high-yield funds to continually grow my future income stream, as I discussed in my recent coverage of RiverNorth Opportunities fund (RIV):
The 4 CEFs that I will review in this article include:
This global credit strategy income CEF from fund manager abrdn is one that many have written about disparagingly, even very recently, even though the fund has consistently paid a steady monthly distribution of $0.10 per share for over three years, which represents an annual yield of about 17.5% as of today, February 7, 2024. Here is the 3-year dividend history as shown on Seeking Alpha.
I had an opportunity recently to listen in on an abrdn fund managers review of the funds in January and got a good overview of the ACP fund manager’s position with respect to the future distribution, which is expected to remain steady at the same $0.10 per share each month for the remainder of the year. Furthermore, ACP is reorganizing and absorbing the assets from two other CEFs currently managed by First Trust. On January 19, ACP shareholders approved issuing new shares to complete the merger:
To approve the issuance of additional common shares of beneficial interest of the Fund in connection with the reorganization of First Trust High Income Long/Short Fund (“FSD”) and First Trust/abrdn Global Opportunity Income Fund (“FAM”), each a closed-end fund, with and into ACP.
On February 20, the shareholders of both FSD and FAM will vote their approval (or disapproval). Assuming that those shareholders approve, ACP would then become a much larger fund after integrating the assets from the other two funds into ACP. As was explained to me on the fund managers’ call, this is not a merger but a “reorganization” of funds. What I understand that means is that it will not happen all at once, but over some period of time, possibly several weeks or even months. However, the reorganization is expected to be completed in the first quarter of this year.
Other SA analysts are quite negative regarding the fund’s prospects as can be seen from recent articles discussing it.
Even FSD gets negative reviews, and those opinions contribute to the notion that ACP will not see improvement from a “merger”, although I disagree.
In fact, the recent performance of FSD over the past six months has demonstrated an even better total return than ACP, which leads credence to the idea that a reorganization that combines the best of the FSD fund holdings into ACP (and potentially selling off the losers from FSD) could very well improve the future performance of ACP.
As of November 30, 2023, according to the ACP fact sheet, the 1-year NAV total return was 14.87%, however, because the fund was trading at a very wide discount at that time the market price return was much lower. This highlights one of the reasons why buying CEFs at a discount (especially at a wider than average discount) can offer even stronger returns.
I was buying shares of ACP in October and November last year to take advantage of the wider discount, yet even today the fund still trades at a slight discount of about -3% while paying a steady high-yield distribution. The ACP fund offers a compelling return for income investors while the discount persists.
As can be seen in the overview chart above from CEFconnect, that discount has been closing the gap over the past few months and as the NAV continues to rise (especially after FSD and FAM get rolled in) the opportunity to buy shares at a discount remains, but for how long?
Collectively known as the Cornerstone funds, CLM and CRF both offer a level distribution that is set at the beginning of the year and is based on 21% of the fund NAV as of the last day of October in the previous year. Because the low point of the year was the end of October in 2023, that resulted in a reduction in the monthly distribution from the previous year, but still results in a yield that offers income investors about 18% in the case of CLM and 17.5% for CRF at current prices as of February 7.
Using CEFconnect to show the overview summary of the fund, it is quite evident that both the fund NAV and market price bottomed at the end of October 2023. The premium nearly disappeared before resuming its rise to the current premium of 4% in the case of CLM and about 8% for CRF.
The two funds have very similar holdings and price action with the main difference being that CLM is about twice as large with about $1.5B in AUM while CRF holds about $700M. Both CEFs allow investors to reinvest monthly distributions at NAV, which is typically much lower than the market price because the funds have traded at a premium for most of the past few years. The higher the premium, the more investors can benefit from reinvesting new shares at NAV, which also helps to grow the funds’ overall AUM. Also, when the premium got big enough in the past, the funds announced a rights offering or RO, which is another opportunity for the fund to issue more shares typically at a much lower price than the market. However, the premium never got high enough in 2023 for an RO to occur.
Investors in the Cornerstone funds can take advantage of the reinvestment at NAV and the RO whenever they do occur to acquire more shares at a discount. With the top holdings in both funds performing extremely well over the past few months, I expect the premium to increase along with the NAV.
The top 10 holdings in CLM as of 9/30/23 are shown below.
Meanwhile, both funds will be paying out steady monthly distributions for the remainder of the year at a current annual yield that exceeds 17%. The two C funds represent my two largest income holdings currently.
Both CLM and CRF tend to get mostly Sell ratings from other SA analysts, although occasionally someone “gets” the funds like I do and suggest buying as in this recent review of CRF. This is the advice from that author:
We advise putting CRF on your watchlist. We rate it a Buy if it gets closer to a lower, 10% premium to NAV. Looking at the premium/discount chart above shows that investors who bought CRF at a ~10% premium since Q3 '20 have done alright on a price basis, in addition to receiving very attractive monthly distributions.
With CRF currently trading at a premium of about 8%, that puts it in the author’s Buy range. CLM trading at only a 4% premium currently makes it an even better buy in my opinion.
Another high-yield CEF that does not get much love from SA analysts is EDF. I have written in the past about EDF and the former sibling fund, EDI, which has since merged into EDF. My most recent article was published in August 2023 just a few months before the merger was completed explaining why I believed that the Emerging Market debt sector was (and still is) a good place to invest for income.
The performance of EDF over the past year correlated to some extent with the strength of the US Dollar as can be seen in this chart showing total return performance for EDF over the past year as compared to DXY. In those cases where the dollar weakened, you can see the return for EDF rise.
While the USD is starting to rise again in February after a stronger-than-expected jobs report, the impact has not yet been seen on the EDF fund. In fact, EDF has continued to pay a steady monthly distribution of $0.06 per share since November 2021 as can be seen in the Dividend History from SA:
While the fund traded at a premium for most of 2023 up until October, that premium has now all but vanished even though the NAV has begun to recover from its October low. That price movement can be seen graphically on CEFconnect. With a 6-month Z score of -0.13 and a one-year Z score of -0.52, the fund is in Buy territory as the price is likely to rise to a premium once again with the steady high-yield distributions expected to continue in 2024.
As Emerging Market Debt turns the corner in 2024, many are expecting outperformance from this investment sector. This insight from Alliance Bernstein is one example of that positive outlook.
Despite high interest rates, geopolitical instability and sluggish economic growth in China, emerging-market bonds posted strong returns in 2023. While some headwinds may continue in 2024, we expect accommodative monetary policy, declining inflation and a weaker US dollar to provide support for the sector.
This insight from Lazard suggests a promising outlook for both EM equities and debt in 2024.
Because fixed income markets historically tend to generate equity-like returns during the period between the end of central bank rate hikes and the completion of rate cuts, we remain constructive on EM debt amid a backdrop of ongoing monetary cycle easing.
While EDF is not the only EM Debt fund it does offer investors some potential price appreciation as the NAV is likely to increase in 2024. EDF pays a very high-yield distribution of $0.06 per month which equates to an annual yield of nearly 16% at today’s closing price of $4.56. The fund’s holdings include more than 50% in Latin American countries, nearly 30% in Africa, and only about 10% in Asia as of the end of 2023 as shown on the fund website.
The EDF fund, with its emphasis on emerging market debt, is also a good diversifier away from US-centric funds that could underperform as the dollar loses strength when interest rates do eventually fall.
While the past performance of EDF has not been great at least partly due to ongoing strength in the US economy, the future opportunity to realize a healthy income stream from a steady high-yield distribution offers income investors an incentive to buy while the fund trades at just a slight premium of about 1%. Don’t let the naysayers scare you away from a good investment whose time has come.
These are just four funds that I wanted to write about today, out of about 50 total holdings in my IC portfolio. I feel that these four all offer strong potential for realizing high-yield income for at least the next 10 to 12 months and should be on your watchlist if you are an investor interested in growing your future income stream like I am.