As the U.S. stock market sold off in the fourth quarter of 2018, lower volatility smart-beta ETFs ga...
Three Blue Chip Funds at a Discount
12/19/2018 5:00 am EST
Ignore the doomsayers: 2019 is setting up to be a strong year for equities—and a great year for dividend investors like us, forecasts Michael Foster, closed-end fund expert and editor of the industry-leading CEF Insider.
Thanks to the record-breaking profit growth we’ve seen in 2018, along with continued steady gains in employment and wages, there’s little reason to believe next year will bring the big downturn everyone’s worrying about. Instead, the Fed’s prudent scaling back of interest-rate hikes should fuel more growth.
The Eaton Vance Enhanced Equity Income Fund (EOI) isn’t a household name, even if its holdings are: Microsoft (MSFT), Apple (AAPL), Amazon (AMZN) and JPMorgan (JPM) are its top positions, and they’ve helped its underlying portfolio (known as its net asset value, or NAV) deliver a positive return for 2018, even as its price return has been negative.
Since EOI’s returns closely follow those of the S&P 500, which is up barely 1% for 2018, I can excuse this flat return in a tough year—especially since EOI gives you a 7.8% dividend. And thanks to the fund’s long-term NAV strength (its underlying portfolio has delivered a 23.6% total return in the last two years), that dividend remains sustainable, despite the market’s recent weakness.
When investors discover that this fund trades at a 6.9% discount, the lowest since the start of the year and wider than its long-term average, I expect them to buy in at a fast clip, and that makes this an attractive fund to buy now.
Berkshire Hathaway (BRK.B) doesn’t pay a dividend, but that doesn’t bother us, because we can invest in Warren Buffett’s company and still get a healthy 3.6% payout through the Boulder Growth and Income Fund (BIF).
This value-investing fund is so closely modeled after Buffett’s investing principles that a third of the fund is in Berkshire itself! The rest is focused on bargain stocks like Walmart (WMT), Pfizer (PFE) and Johnson & Johnson (JNJ). That has helped the fund see pretty much the same growth as the S&P 500 in 2018.
More crucial, however, is the fact that BIF sports a 17% discount that’s recently recovered from a near-record low, so it appears to have reached the floor of how much the market will let it get sold off.
This deal has been around for a few months now, but it’s unlikely to stick around — and a strong market recovery could see BIF’s deep discount slowly evaporate as more investors turn to value stocks. That disappearing discount will hand you nice gains if you buy now.
There’s a lot to like about the Liberty All-Star Equity Fund (USA), including an incredible 11.2% dividend yield and a discount to NAV that has been steadily vanishing. We’ve seen a big correction to that long-term trend in 2018.
Recent market panic has caused the fund’s move toward a par valuation to suddenly reverse, despite the fact that its equity portfolio has crushed the S&P 500 over the last couple years.This kind of drop in the fund’s discount is a clear buying opportunity, since nothing about USA’s fundamental performance has changed—it continues to move in lockstep with the market — as it has through most of 2018.
What’s more, USA beat the market during the recovery months of April, May and June. And with continued market gains ahead in 2019, that outperformance will likely come again.
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