For most of the last three years, real wage growth lagged inflation, which meant workers’ raises were not enough to keep up with sky-high inflation. That changed in June when earnings growth finally exceeded CPI numbers.

It’s about time – but that doesn’t mean income is any less important in your portfolio, given the potential for volatility. The main question is where we want to look to generate income.

Over the past few months, I’ve spent a lot of time drawing your attention to various income opportunities including infrastructure and utilities closed end funds, data center REITs, individual energy and resource stocks, and tax-advantaged dividend income funds, just to name a few. But there are still plenty of opportunities out there for anyone seeking a solid foundation in income investments.

As with recent watchlists, today I want to focus our attention on inflation-beating closed end funds (CEF). In case you’re not familiar with CEFs, they are a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.

This week I found a great one for you: I’m watching FS Credit Opportunities Corp. (FSCO), a CEF that invests in fixed income markets.

The majority (93%) of the portfolio is in the United States, across a range of industries. The top four sector allocations are as follows: Healthcare Equipment and Service, Consumers Services, Capital Goods, and Commercial and Professional Services with weighting of 16%, 12% 10% and 10%, respectively.

Regarding the portfolio: 82% of the portfolio is senior secured debt (a category which includes first lien loans, second lien loans and senior secured bonds), 62% of the portfolio is tied to floating rates (includes floating rate assets on a look-through basis within FSCO’s Asset Based Finance investment), and the average duration of the debt investments is 0.9 years.

Regarding FSCO, the average “duration” is one of the first things that caught my attention because duration measures the sensitivity of a fixed income investment’s price to changes in interest rates. For instance, a duration of 0.9 years suggests that a 1% rise in interest rates would equate to a 0.9% decline in FSCO’s NAV and vice versa as rates fall.

Here’s why that’s important.

The Federal Reserve is coming very close to ending its rate-hike cycle, and even though the yield on U.S. 10-year Treasuries is on the rise, we’re a lot closer to rates coming back down than we are to rates skyrocketing another 200-300 bps.

Once rates do start to come down, FSCO’s NAV will likely start to rise, and its share price could eventually follow.

How much could it rise? As I write this, FSCO is trading at a 24.25% discount to its NAV, so we have a chance to pick up shares now at a huge discount.

And the best part for income investors, FSCO is delivering a very healthy 13.03% yield. So you’re also getting paid a massive dividend while you’re waiting for the fund to appreciate.

— Shah Gilani

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Source: Total Wealth