A group of funds is doing something very unusual at the moment: they are increasing their dividends to double digits! And those huge hikes have pushed the returns on some of these little-known income games to well above 7%.
Today we’re going to jump at this searing counter-current opportunity.
These well-managed dividend payers (and producers!) Are closed funds (CEF) who hold variable rate loans. These assets are often overlooked, which is a shame, as it is corporate bonds that do the opposite of what most bonds do. This makes them perfect buys for the upside in today’s market, when “regular” corporate bond prices plunge.
Let me explain how variable rate loans work and how we are going to cut them down to get big gains and growing dividends of 7% and more.
The contrarian income seeker’s best friend
When inflation fears rise and interest rates rise, most bonds, especially corporate bonds, lose value. This is why the SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
This higher interest rate is due to inflation. Thanks to the recently passed $ 1.9 trillion stimulus package, a recovering economy and higher-than-expected consumer spending, economists warn prices could exceed the below 2% annual rate we’ve seen over the past decade. And that caused the sale of all kinds of corporate debt.
But this is the kind of market in which variable rate loans thrive.
There are two reasons for this. The first is that, unlike fixed rate bonds, the yields on variable rate loans up with interest rates. This is how two of the 21 floating rate CEFs increased their dividends last month, and this is why the other 19 will likely follow soon.
The other reason is not so obvious, but arguably more important, and it has to do with creditworthiness. Interest rates rise in an improving economy, and an improving economy means that companies are less likely to default on their debts. Obviously, 2020 has been a time when many businesses have struggled to repay their loans, which is why default rates increased by over 10% last year, despite loan relief programs. to companies that have been adopted.
Coronavirus Adds Risk to Business Lending
But 2021 is different. On the one hand, the $ 1.9 trillion relief plan adds even more money to help businesses meet their debts. And second, we now have vaccines being deployed quickly, so businesses will see more customers walk through their doors. And that means variable rate loans are likely to experience even higher demand.
All of this makes variable rate loans a great investment for rising in this environment, and as I mentioned earlier, their dividends are also high and growing. The largest variable rate CEF is also the most productive; the Nuveen Credit Strategies Income Fund (JQC) is reporting an almost unthinkable return of 12.7%, and the fund, marked in orange below, has posted a total return that has doubled that of the S&P 500 this year.
What makes JQC even more tempting is its 8.8% discount on the net asset value (NAV). This is another way of saying that the fund is trading at a price lower than the intrinsic value of its portfolio. We can also see that her discount is steadily decreasing, and I expect her to continue to do so in the weeks to come.
This makes JQC worth your attention if you are looking for high current yield. But what about dividend growth?
This is where the Nuveen Floating Rate Income Fund (JFR) His 7.3% return is lower than JQC’s, but his 7.9% discount is similar, and he just increased his payout by 21%. Additionally, if we look at the value of the portfolios of both funds, we see that JFR is doing a much better job of increasing the value of its net asset value.
This outperformance makes JFR a good place to park money and generate high dividends and strong growth in a still volatile stock market environment and inflationary concerns.
Michael Foster is the Senior Research Analyst for Contrary perspectives. For more great income ideas, click here for our latest report “Indestructible Income: 5 windfall funds with safe 8.3% dividends.“