The three managers of Akre Focus Retail Class (AKRE) liken their investment process to a “thre...
Three High-Income Bargains
11/04/2008 1:00 pm EST
Mark Skousen, editor of Forecasts and Strategies, finds three good closed-end funds selling at discounts that pay out double-digit yields.
Interest rates on Treasury bills, Treasury bonds, and other “safe” government securities have fallen to their lowest level in decades, and the Federal Reserve cut the target rate to 1.5% last month, another sign of panic. (It cut short-term rates to 1% last week—Editor.)
Meanwhile, the Federal Deposit Insurance Corp. announced that it will guarantee money market funds, which helped stabilize the cash market. The US Treasury, given new powerful authority to buy US banks and guarantee interbank loans, joined forces with European central banks and governments to inject new liquidity into the banking system and avoid further defaults.
When the government starts guaranteeing debt, perhaps it’s time to invest in debt! In the aftermath of the September-October stock market crash, there are bargains galore. High-income funds, especially closed-end funds, offer the best opportunity in today’s uncertain climate. Most are selling at record discounts to their underlying value, and offering “super dividends” of 12-17% right now.
For example, the Chicago-based prime rate fund, Van Kampen Senior Income Fund (NYSE: VVR), yielding $13.7%, is selling at an unprecedented 40% discount to its net asset value ($6.05). (The fund closed at $3.65 Monday—Editor.) Meanwhile, amazingly, VVR just increased its monthly dividend payout to four cents a share, up from 3.8 cents. (Admittedly, this is much less than what it was paying earlier in the year—5.8 cents.
Another closed-end fund to raise its dividend is Western Asset Global Partners Income Fund (NYSE: GDF), a dollar-denominated emerging markets income fund. It raised its dividend payout last month to 9.5 cents a share. [At Monday’s closing price of about $7], it now is selling at an 11% discount to NAV ($7.89).
Junk bond specialist, BlackRock Debt Strategies Fund (NYSE: DSU), now is selling at a slight discount to its NAV ($3.77). The biggest fear with this fund is that corporate defaults on junk bonds will rise during the recession. Fortunately, DSU continues to pay a regular, 5.3-cent dividend each month. (It closed at $3.72 Monday and yields 17.7%—Editor.)
How many businesses offer 15% or more into the future? In today’s environment, not many do. So the closed-end funds, which are all selling at a huge discount to their net asset value, are good deals—as long as they keep paying their dividends! So far, they have kept paying.
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