Rida Morwa is a leading income specialist and editor of High Dividend Opportunities; here he highlights three favorites — a value play, a "go-to" idea for corporate bonds and a real estate fund.
Royce Value Trust (RVT)— a "set it and forget it" closed-end income fund — that has been around for a long time. Since November 1986, RVT has been investing in small-cap value stocks and beating its benchmark, the Russell 2000 index.
When investing, the tortoise wins the race. Royce Value is not the kind of fund that will run ahead of the market and beat it by 30%+ in a single year. It is the kind of fund that beats the market by a few percent here and there several times a decade. Over time, this small edge adds up to large gains.
Royce Value has a variable distribution policy, paying out 1.75% of the rolling average of the prior 4-quarters NAV. As a result, we expect that RVT's distribution will continue to trend downwards for Q4 and possibly Q1 2023. After that, the bias should be for the payout to start trending upward again. (Our 7.5% yield calculation is based on a conservatively-low recent $15.28 NAV.)
Royce Value Trust has proven itself, outperforming the market indexes over many decades. A feat that few managers have performed. As the market starts recovering from the current bear market, we can participate in the recovery through this fund — confident that as prices recover, we will be rewarded with more dividends.
Managed by one of the best bond fund managers in the world, PIMCO Corporate & Income Opportunity Fund (PTY) is a bond fund that has managed to outperform equity funds. I've bought PTY when it was "expensive," I've bought it when it was cheap, I've bought in bull markets, bear markets, and even when the world was coming to an end.
PIMCO has shown an ability to make refreshing lemonade out of lemons. When other institutions were dumping mortgages at fire-sale prices during the Great Financial Crisis, PIMCO was snapping them up for pennies on the dollar.
Periods of distress have historically been opportunities that PIMCO has seized to buy cheap assets and outperform during the recovery. I am confident it will do so again. Overall, PTY is my go-to bond fund. Buy a little here, a bit more there, and my income stream keeps growing because my capital is in good hands.
Cohen & Steers Quality Income Realty Fund (RQI) is a great option to gain leveraged exposure to the REIT sector. In 2022, RQI has concentrated its portfolio on quality. RQI's top 10 holdings are a "who's who" of what we would consider "blue chip" REITs. RQI recognized that quality was on sale and bought hand over fist.
Why are REITs out of favor? Interest rates. REITs tend to use a lot of leverage, so the market perceives rising interest rates as a threat to them. However, all of the REITs in RQI's top 10 have very strong balance sheets and spent much of 2020 and 2021 refinancing debt at historically low-interest rates.
REITs started rebounding after strong Q3 earnings, and recent inflation data has the market believing that the Fed will slow down on rate hikes, helping sentiment. As sentiment starts matching the actual results REITs are producing, RQI is positioned to rise. While we wait, we can collect a much higher dividend than we would get if we owned these holdings directly.