Financial Opportunities: A Closed-End Fund to Bank On

11/04/2020 5:00 am EST

Focus: FUNDS

Michael Foster

Editor, BNK Invest

Earnings season is yet again upon us, and we’ve seen a lot of good numbers in a sign that the economy is recovering; most impressive have been the banks, suggests Michael Foster, closed-end fund expert and editor of Contrarian Outlook's CEF Insider.

Even though the banks get a bad rap from the press, their rising profits are the result of a sturdy financial system that’s helping the broader economy get back to where it was.

We’re not there yet, but we’re on a good trajectory that will benefit everyone—which, by the way, is another reason to invest in the equal-weighted strategy our new pick, GPM, follows!

The bank results are also good for the John Hancock Financial Opportunities Fund (BTO). The fund has required some patience on our part, but remember that BTO focuses on common and preferred shares from regional and national banks.

An investment in BTO is an investment in the banking system’s ability to continue to churn out profits. And with the recent results, it seems clear that the banks are in a strong position, even if the market hasn’t caught up with this fact, with the sector still down some 19% on the year. 

That makes now a great time to invest in the financial sector. Adding to its appeal is its 9.7% dividend, which has powered through the crisis unscathed. Meantime, the fund’s already-huge dividend is soaring.

Crucially, BTO has been able to pull off this payout growth both when rates were going down (in the early 2010s) and when rates were going up (in the late 2010s). 

Despite the slight premium, this reliable payout growth still isn’t priced in: investors are still worried the banks will lose profits because of the pandemic, even though third-quarter results have thrown a wrench into that theory.

Slowly they’ll realize their mistake and move back into bank stocks, which is why BTO is worth holding on to now and for the longer term.

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