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When the market goes to the dustbin like it has in recent months, one group of people have an advantage: those who hold high-yield closed-end funds (CEFs).
If you haven’t already, now’s a good time to join this group thanks to the sale. I’m about to give you an oversold bond fund that’s a great choice to start your CEF portfolio with — or add to your current portfolio. It pays a steady 7.5% payout coming your way monthly.
A “dividend lifeline” with a 7.5% yield
Investors in “regular” stocks only wish they could receive such a payout. Unfortunately, the meager dividend on the typical S&P 500 stock (around 1.5%) means those sticking by the household names are dependent solely on price gains, forcing them to grapple with sickening declines like the mess of 2022 To finish!
Of course, CEFs have also fallen like normal stocks in recent months. But instead of low (or no) dividends, our CEF holders accumulated a large stream of income that reduced their need to sell shares of their funds at bargain prices to pay their bills.
Holders of the CEF that we will focus on today – the AllianceBernstein Global High Income Fund (AWF)– collected such an income stream. Despite the market disaster, AWF’s payout, which yields 7.5% today, has been as stable as ever.
The monthly payment from AWF rolls right through the crisis
History of AWF distribution
CEF Connect
With a payout of this magnitude, you can invest $100,000 in AWF today and receive $7,500 in annual dividend income. And the fund’s well-constructed portfolio and accomplished management team are good reasons to consider doing just that.
A dividend on a strong foundation
AWF generates its strong cash flow from a diversified portfolio of bonds from countries around the world, about 70% of which are American-based. The rest of the portfolio will be filled with assets from the UK, Brazil, Germany, Sweden and Australia.
AWF’s diversified portfolio: our “dividend backstop”
AWF Geographical Breakdown
AllianceBernstein
The justification for the tariffs
I know what you’re probably thinking: “But wait, since bonds tend to move inversely with interest rates, do I really want to hold bonds like this when interest rates are rising?”
That’s a good question. In fact, rising interest rates are already priced into bonds, which is why long-term US Treasuries in particular have fallen sharply this year.
One thing to note here is that we are well above the mid-June bottom, and for one simple reason: fears of rising rates are already priced into bonds. With rate hike expectations peaking in mid-June, the bond market was at its lowest point at the time – and AWF is up around 12.5% since then.
The reason for this is simple: AWF has a collection of bonds with different maturities and different US interest rate risks thanks to management’s more active approach to the markets. Thanks to this active approach, AWF has been circling around the US Treasury benchmark ETF since AWF’s inception.
And just like in 2009, 2016, 2018 and 2020, AWF is currently beginning a recovery from a short-term sell-off, as you can see in the chart above. This also reduces the discount to the net asset value (NAV, i.e. the value of the bonds in the portfolio), which was last at over 10% (now 4.6%). I expect this discount to narrow further as more investors realize that near-term worries about the economy are already priced in.
Rate hike cycle could be in late innings
Also, remember that both stocks and bonds are forward-looking, meaning they don’t price in yesterday’s fears of higher interest rates, but instead price in tomorrow’s interest rate outlook. This might sound a bit confusing, but this chart should set things straight.
The end of the rate hike road?
Fed target rate probabilities
FedWatch.com
According to Fed futures markets, rates will rise in September, November and December, with a forecast pause after that and possible rate cuts later next year.
Bond traders are trying to preempt this shift and buy ahead of the average investor, which is why bonds have risen sharply since June. And until there is economic data to refute that view, bonds are likely to continue to rise, giving AWF substantial gains on top of its 7.5% income stream.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report, Indestructible Income: 5 Bargain Funds With Safe 8.4% Dividends.
Disclosure: none
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