In this report, we share updated data on over 100 big-yield CEFs, BDCs and REITs, giving careful consideration to current market conditions and select attractive individual opportunities. We also review the important distinction between dividend-growth stocks and high-income NOW securities (with regards to determining your own personal investment goals). Without further ado, let's get into it.
Closed-End Funds ("CEFs"):
When it comes to CEFs, the big-yield opportunities vary widely (across asset classes, market sectors and strategies), but so do the unique risks (such as leverage, sources for distributions, and wide premium-versus-discount variability). Here is a look at some updated data, as of the the market close on Friday.
data as of Fri Mar 3rd. Source: CEF Connect, Stock Rover
We recently shared a report with members on two interesting CEFs opportunities, including:
PIMCO's Bond Funds (PDI) (PTY): These two hugely popular big-yield PIMCO funds have some surprisingly unattractive characteristics that many investors are not aware of. We shared the details with members here.
Attractive 6.9% Annual Yield CEF: An attractive big-yield fund that has been around since 1929, trades at a significant price discount versus NAV and has a lot of "lumpiness" to its distribution payments that lead to misunderstanding by many investors. Here is the report.
Business Development Companies ("BDCs"):
BDCs provide financing (mostly loans) to smaller (middle market sized) businesses. More specifically, they generally provide the types of loans that are too small, too unique and/or too risky for traditional banks (especially following the more stringent bank lending requirements following the Great Financial Crisis of 2008-2009). As such, BDCs generally pay large dividends (they are mostly exempt from corporate income tax) based on the higher rates they earn on the higher risk loans they provide.
And as you can see in the following table, BDCs have had a very strong start to 2023, but their 1-year performance (including YTD returns) is still quite weak.
Data as of Tues, Feb 28, 2023. source: StockRover
Importantly, as economic conditions become more challenging (i.e. rising rates, slowing growth), BDCs face increasing risks. For example, as rates rise, the risk of loan defaults rises (because it becomes increasingly challenging for many loan recipients to stay current on their floating rate loans). It also makes it harder for BDCs to originate new loans (simply because the economy has slowed, and their are less healthy middle market businesses looking for loans).
However, we believe despite deteriorating economic conditions, BDCs will remain relatively healthy for one main reason: Strong Balance Sheets. For example, BDCs are allowed financial leverage up to 2.0x (this is up from only 1.0x prior to new regulations passed in 2019), and most BDCs remain well below this level. For example, you can see in the table above that most BDCs have debt-to-equity ratios of just over 1.0x (well below the 2.0x regulatory limit). And as long as the economy doesn’t great dramatically worse, BDCs generally have plenty of strength to weather current economic challenges.
Ares Capital (ARCC): We recently wrote a report about the increasing risks and rewards of this popular BDC (i.e. the largest BDC in our table above). You can access the members-only ARCC report here.
Real Estate Investment Trusts ("REITs"):
As you can see in the following REIT table, residential properties’ 1-year performance has been ugly (which makes sense considering new mortgage originations have fallen to multi-decade lows following the sharp hikes in interest rates which make owning a home (via a mortgage) a lot more expensive. And considering inflation is driving rents dramatically higher thereby creating challenges for renters too. For some perspective, here is our recent note on Mortgage REITs.
Data as of Tues, Feb 28, 2023. source: StockRover
And as bad as residential REITs have performed, office REITs have been even worse (see data in the table above). According to a recent CNBC report: Full-time office work is dead. Contrarians may want to tread lightly.
We also recently shared a quick note with investors on one big-yield REIT in particular:
Medical Properties Trust (MPW): Despite the large dividend yield and 10-year track record of dividend increases, MPW has some of the highest short-interest around (i.e. investors betting against the shares). You can access our quick note on MPW here.
Dividend Growth versus High Income NOW
Important to note, many of the investments we have discussed in this report offer very high current yields, which can be exactly what some investors are looking for. Others prefer lower yields with the potential for significant long-term dividend growth. For example, readers can check out our strong opinions on two very popular ETFs, one that offers dividend growth (SCHD) and the other that offers a very large current yield (JEPI), in these two recent reports:
For those of you focused on dividend-growth stocks, you might also consider our members-only "Income Equity Portfolio" (it has over 30 very attractive dividend stocks with impressive trajectories of dividend growth).
And for those focused on high current yields, you might consider our all-new "High Income NOW" Portfolio.
Conclusion:
Recent macroeconomic conditions, combined with media fearmongering, have created significant market volatility and declines over the last year. However, despite the gloom and doom, the economy will get better, and the market is eventually going much higher. Current market dislocation has created some exceptional long-term opportunities (especially high-yielders), and we are sharing selective top ideas (trading at attractive prices) with our members. Be greedy when others are fearful.