A Bargain Closed-End Income Fund

Focus: FUNDS

Richard Young Image Richard Young Editor, Young's Intelligence Report

If you can find a solid income fund that's trading at a discount, it means you're buying top income stocks at below-market prices, notes Richard Young of Intelligence Report.

This month, I want you to purchase BlackRock Enhanced Equity Dividend Trust (BDJ). The closed-end fund's shares represent a portfolio of high-yield dividend-paying equities. To generate more income, the fund issues covered calls against its equities and uses the premiums to bolster its dividend payment.

Today BDJ yields 7.5%, and the strategy employed by fund management takes advantage of upside potential and protects against downside risk. The upside comes by investing in high-dividend payers.

An analysis by Young Research finds that since 1938, the 10% of stocks with the highest dividends have outperformed the 10% of stocks with the lowest dividends by over 570%. That's upside protection.

During bear markets, the call options sold by BDJ to generate income are worth more. As volatility increases in bear markets, the prices of call options increase, providing the fund with greater cash flow. A higher level of cash flow helps to protect against downside risk in a bear market.

What Else?

Perhaps one of the most compelling reasons to invest in a closed-end fund offering a 7.5% yield is to compare it to the alternatives. Risk-free T-bills are paying zero. Zip. Zilch. Nada. Factor in inflation, and you're losing money by lending to the federal government short-term.

Lend long, and you take on duration risk that will make your head snap when rates are allowed to normalize.