Michael Brush

Opinion: Grab these 2 funds with rich 11%-12% yields while you can

If you invest for income, consider taking advantage of these unusual opportunities

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With much of the U.S. stock market in a correction there are plenty of attractive stocks to consider. This is especially true in income investing.

The shares of some yield-oriented closed end funds (CEFs) have fallen so much, several of them now offer 10% payouts or more. If you invest for income, consider taking advantage of these rare opportunities.

Of course, there’s a chance you could lose money on these rich yield plays if stock prices decline. So, you don’t want to put all your eggs in these baskets, as a yield investor. 

Strive to guard against capital depreciation from yield-stock declines by focusing on high-yield stocks that insiders are buying in size. I also think we have seen the end of heavy bond selling which increases Treasury bond yields and therefore pushes down the shares of stock market yield plays. (The shares have to decline to keep their yields competitive.) 

Here’s why I think Treasury yields are probably not going back up. 

First, a lot of the heavy bond selling that drove down Treasurys and spiked yields was due to institutional investor tax-loss selling. Insitutions have to finish their tax-loss selling by the end of October, and that’s behind us. 

Next, bond investors were also selling because of fears about excessive inflation or out-of-control federal spending levels. But those fears are easing. 

If this analysis is accurate, then the risks of declines in the shares of the yield plays listed below is small.

In fact, it looks increasingly like inflation will be tamed. Plus, with Rep. Mike Johnson (R-LA) in place as Speaker of the House, it is plausible the U.S. government may take some action to contain growth in spending and debt. 

These two factors make bonds look more attractive, so investors buy them, driving up bond prices and pushing yields down. In fact, the yield on the 10-year Treasury has recently fallen sharply to 4.58% recently from 5%. 

Yields are also falling because rising jobs claims just signaled further cooling off in the economy, which could help contain inflation. This makes bonds look more attractive so bond prices rise, driving down yields. 

Closed end funds

A closed end fund (CEF) is a type of mutual fund that issues a fixed number of shares to raise capital. Its shares are then traded in the market. CEFs invest in a stocks and debt.

In contrast, open-ended funds like mutual funds accept constant inflows and outflows of money. They issue new shares and retire shares in response. 

In the past few weeks, there’s been some big “insider” buying at several CEFs. The buyers are “beneficial owners” because they own large positions. A lot of the buying has been done by Boaz Weinstein, who runs the hedge fund Saba Capital Management. 

Weinstein is building positions in several CEFs run by BlackRock BLK, +2.02%, because he’s an activist who wants to pressure BlackRock into making changes that would favor him as an owner of these funds. CEFs often trade at significant discounts to net asset value (NAV), the market value of the securities they hold. When CEFs convert to open ended funds, or close and sell their assets, owners like Weinstein get an instant gain. 

I don’t know if Weinstein will be successful in his activist gambit. But I don’t mind owning the CEFs he likes because in the meantime they pay some nice yields. 

Here are two that I particularly like from a contrarian stance — one in health care and one that holds small- and medium-size companies or “smidcaps.” Both of these areas of the market are hated right now. I prefer CEFs that trade at bigger than normal discounts to NAV; discount to NAV numbers come from Morningstar Direct, a sound data source on CEFs. 

1. BlackRock Health Sciences Term Trust BMEZ

Recent yield: 11.9%

Recent discount to NAV: -14%

Three-year discount to NAV: -10.5%

The fund specializes in health sciences stocks and related derivatives. This makes it a play on the current out-of-favor nature of biopharma. Top holdings include the more mature and profitable names in biopharma and health care including UnitedHealth Group UNH, +0.41%, Eli Lilly LLY, +1.08%, Merck MRK, -0.97%, AbbVie ABBV, +0.40% and Johnson & Johnson JNJ, -0.12%. Weinstein bought $5 million worth of this CEF in late October, according to Insider Monitor. 

2. Blackrock Innovation & Growth Term Trust BIGZ

Recent yield: 11.9%

Recent discount to NAV: -14.6%

Six-month average discount to NAV: -16.5%

Three-year discount to NAV: N/A

The fund invests in smidcaps it expects to show above-average earnings growth potential. This is particularly interesting right now, given how poorly smidcaps have performed. They should bounce back sooner or later, since they trade at historically wide discounts to large caps. If that happens, this CEF should do well. The fund holds 58 stocks for broad diversification. Weinstein purchased more than $41 million worth of this fund in October, according to Insider Monitor. 

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned BIGZ. Brush has suggested BMEZ, LLY, MRK, ABBV, JNJ and BIGZ in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.

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Also read: ‘Bond funds are the devil in disguise’: You have to know what you’re actually buying.