Here’s where I see stocks now: Yes, we’ve got some legitimate concerns as some economic warning signs appear—and run up against the tech-driven optimism that’s powered stocks to lofty heights.
The result? Volatility.
So today we’re going to look at a couple quick moves we can make to both protect ourselves and tap into the bargain income opportunities—including a 10.6%-paying closed-end fund (CEF)—that times like this always turn up.
For that, we’re really talking about two things.
First up, we’re going to add income plays beyond stocks. Specifically, we’re going to look at corporate bond–focused CEFs, many of which are paying double-digit yields and are poised to tack on serious price gains as the economy slows.
Second, we’re going to do something most investors overlook (or just plain don’t want to do!): Cull (or at least trim back) holdings that have gotten a little too overvalued in the last couple years.
That last part is key, because before you know it, a rising asset can take up more of your portfolio than it should, leaving you vulnerable in a broader market crash.
Let’s start with those bond CEFs—one in particular. Then we’ll go to (I admit, a bit of an extreme) example of a fund that’s risen further into the stratosphere than, frankly, any CEF I’ve ever seen.
Step 1: Buy Corporate Bond CEFs (Starting With This 10.6% Payer)
Over at my CEF Insider service, my members and I have been rallying behind corporate bond–focused CEFs for a while now.
The Fed, as we all know, is keeping rates higher for longer than anyone expected a year ago. That’s allowed bond-focused CEFs to use this time to buy more high-yield bonds and lock in the high payouts they, in turn, are sending out to investors.
Moreover, those bonds will gain in value as rates fall, since they’ll be worth more than newly issued, lower-yielding bonds. The fact that corporate defaults remain low is also adding to corporate bonds’ value.
Both factors have given our CEF Insider portfolio’s corporate-debt bucket a push this year. One particular holding that looks particularly attractive right now is the Western Asset High Income Opportunity Fund (NYSE:HIO), payer of a 10.6% dividend.
This fund is also still sporting a discount to net asset value (NAV, or the value of its underlying portfolio), as I write this, currently around 2%. Its bonds also have a weighted average duration of 6.8 years, helping it lock in its current income stream for the long haul.
HIO has returned a solid 24% since we bought it in the February 2024 CEF Insider issue, and thanks to its outsized (and monthly paid) dividend, pretty well all of that return has been in the form of reinvested payouts.
In other words, HIO, which mainly holds bonds issued by large-cap US companies, has done exactly what we want it to: Keep its price more or less stable so we can collect its rich payout without having to worry. What’s more, that payout has grown during our holding period, too.
A 10.6% Payout That Grows? That’s What We Get With HIO
The best part is, we can still get HIO at a discount, despite its appeal. That’s a very nice setup for us.
Step 2: Sell Overbought Assets (And Avoid Bubbly CEFs Like This One)
Now let’s talk about the second part of our strategy here—cutting back on stocks and funds that have seen their valuations rise to unreasonable levels.
For an example here, let’s literally move from the sublime (HIO) to the ridiculous: A CEF called the Destiny Tech100 Fund (NYSE:DXYZ).
Before I go further, let me say that this fund is instantly off our radar because it pays no dividend. But humor me here, because this is still an interesting, and unique, fund to look at, for no other reason than that it shows the wide variety of assets we can tap into through CEFs.
The first number that pops out at us is this fund’s frankly wild 807% premium to net asset value (NAV, or the value of its underlying portfolio), according to the CEF Connect fund screener.
This massive markup is due to its portfolio, which consists of privately held firms. That would seem to be a positive, since we can’t buy shares of these companies ourselves.
Source: Destiny Advisors
As you can see above, over a third of the fund is dedicated to Elon Musk’s privately held SpaceX. Musk, of course, is controversial, but he does have a, shall we say, enthusiastic, fan base. That’s likely part of the reason for DXYZ’s high premium.
Other investments, like Axiom Space, Boom Supersonic and OpenAI, are speculative, to say the least. Basically, buying this fund means we’re buying into a specific vision of the future, where these companies wind up being leaders.
But even if that comes to pass, that has already been priced into (and then some!) that ridiculous triple-digit premium. That premium also exposes the fund’s market price to a big drop in the event of a broader stock-market selloff.
Since DXYZ’s holdings are private, we can’t look back at their performance histories over the long haul. But we can look at some publicly traded equivalents to get a sense of what a broad market drawdown could do to the fund.
Take Tesla (NASDAQ:TSLA), which really took it on the chin in 2022, shedding nearly two-thirds of its value that year.
Market Panics, TSLA Crashes
As for the other space stocks in DXYZ, the collapse of Virgin Galactic Holdings (NYSE:SPCE) since its IPO offers another example of how volatile this business can be.
Overhyped Space Stock Crashes to Earth
Maybe this time is different, but with DXYZ’s huge markup, we’re overpaying to speculate on the future, especially if earthly economic woes replace moonshot optimism among the technorati in the next few months. There’s just no reason to take that risk.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."