I hope last week’s Iran head-fake didn’t have you thinking about buying so-called “safe” dividends like Treasuries. Because these tired income standbys aren’t safe at all!
With your nest egg yielding a pathetic 1.9%, you’re guaranteed losses, with inflation running at 2.1%. So today we’re going to make a simple contrarian move that will:
- Hand us huge 8.6%+ cash dividends—nearly five times what Treasuries pay.
- Pay us every month, not every quarter.
- Set us up for nice price gains “on the side,” and …
- Give us “Iran insurance,” helping shield our nest egg against swift drops triggered by global instability, an economic downturn—any reason, really.
Because when it comes to income, the best defense is a good offense, so we’re going to forge ahead as the world gets more uncertain and invest more of our cash outside America’s shores.
I know what you’re thinking: “Brett, aren’t other countries’ bond yields even skimpier than those in the US?”
That’s true, for some countries. Heck, some even charge us to hold their debts! Swiss 10-year government bonds, for example, yield negative 0.59% today.
Our Shot at Safe 8.6% Dividends—and Gains—in an Uncertain World
Truth is, there are fewer places around the globe where you can grab any yield at all. But, funny enough, this is exactly where our opportunity to bag 8.6%+ dividends comes in.
As negative rates spread, countries whose bonds boast positive yields—especially those topping the paltry 1.9% on the US 10-year—will likely see their bonds bid higher, driving their yields down in tandem.
One of these opportunities lies in Peru, where we can buy some government bonds yielding 8.75%. And forget stories you hear about Peru being a basket case—they’re outdated. The government boasts one of the strongest balance sheets in Latin America, with a debt-to-GDP ratio of just 27%.
By comparison, we’re running a hot 106% in the US. Even Brazil, where investors are demanding 6.8% yields on 10-year bonds, does better, with public debt running around 80% of GDP.
If we didn’t own the printing presses for the world’s reserve currency, investors might demand higher coupon payments from us, too!
The opportunity here is obvious. But we’re not going to hop a plane to Lima or Rio to grab it. We’ll tap these payouts from the safety of our brokerage accounts.
What I’m about to show you makes these 7%+ yields as easy to buy as Apple (AAPL) or Verizon (VZ)! Better still, with just two buys, we’ll diversify across government and corporate bonds and set ourselves up for nice price upside, too!
The key? Buying through closed-end funds (CEF). Let’s talk about two foreign-bond CEFs—one focusing on government bonds and one on corporate bonds—now.
Bond CEF No. 1: 8.6% Dividends From Sturdy Government Bonds
Grabbing these big overseas bond yields is a tricky job for us to do ourselves, so we want to “outsource” our buys to a seasoned pro. That’s what we get in the First Trust/Aberdeen Global Income Fund (FAM), with an 8.6% dividend paid monthly.
FAM, which holds bonds from both Brazil and Peru, is run by First Trust Asset Management, which boasts income-focused CEFs in areas ranging from master limited partnerships (MLPs) and real estate to bonds and preferred stocks.
Thanks to First Trust’s expertise—it’s been around since 1991—and access to cheap capital (FAM, like most CEFs, borrows to invest: a reasonable 29% of the portfolio is levered today), FAM’s total return, based on market price, has more jumped 134% since inception:
FAM Rides to a Double
Note that this chart shows total returns, including dividends. This means that, because of FAM’s massive payout, investors enjoyed this 134% return in cash. Which is a nice segue into what we can expect from FAM’s payout in the future: more growth.
With the Federal Reserve now focused on cutting rates, more cash is likely to move abroad, driving up foreign-bond prices as it does. That’s helped balloon FAM’s underlying portfolio (known in CEF-speak as net asset value, or NAV). Check out FAM’s NAV growth last year, as the Fed pivoted toward rate cuts:
Fed Cuts, FAM Cashes In
The fund, in turn, is handing its portfolio returns to shareholders in the form of higher payouts:
A Monthly 8.6% Dividend That Grows
Source: CEF Connect
With at least one more cut from the Fed likely this year, FAM is well-positioned to keep growing its NAV (and dividend). Its 6.6% discount to NAV gives us a chance to buy in for 93 cents on the dollar.
Bond CEF No. 2: An 8.6% Dividend for 10% Off
Finally, let’s diversify into overseas corporate bonds with the Western Asset High Income Fund II (HIX), an 8.6% payer with a long history of strong performance.
HIX is run by Legg Mason (LM), which has been in fixed income for 48 years. Since its inception in the late 1990s, HIX has returned 416%, crushing the S&P 500.
HIX: 1, US Stocks: 0
Legg Mason generates HIX’s 8.6% payout through a portfolio that includes high-yield corporate bonds (59.9%), emerging-market debt (22.2%)—about half of which is sovereign, the other half corporate—bank loans (6.9%) and investment-grade corporate bonds (6.6%).
As with FAM, we’ve seen HIX’s portfolio deliver a strong total return since early last year, when the Fed put rate cuts on the table:
“Powell Pivot” Powers HIX
As with FAM, HIX has been growing its payout. In December, it nudged it up to $0.0485 a share, from $0.047 in November and $0.045 a year ago.Connect
The best news? Even with its big price gain, HIX trades at a 10% discount to NAV, suggesting more upside ahead.
— Brett Owens
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This incredible fund boasts high-yield government bonds backed by countries with solid balance sheets. And it holds a lot of bonds, too—290, to be exact. So if a few do happen to run into trouble, we don’t have to worry: it won’t sideswipe the fund’s entire portfolio.
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I know that sounds similar to FAM, the government-bond CEF I mentioned above. But there are two critical differences, starting with performance—my pick has crushed FAM since the latter’s inception in 2004
New Pick Crushes the Competition
But despite that outperformance, this big dividend is cheaper than FAM, trading at a ridiculous 8.2% discount to NAV as I write this, compared to 5.4% for FAM.
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Source: Contrarian Outlook