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The Best CEFs To Buy For 10% Yields In 2020

Where are we to put our money in this levitating market—and how do we dodge the (many) overpriced stocks (and funds) ready for a fall?

Today I’m going to answer both questions, with one group of investments that are way overvalued—even though they look like bargains. Buy these “value traps” and you’re primed for a fast double-digit plunge (or worse).

Then we’ll move on to a group of 10 closed-end funds (CEFs) that are the opposite—most folks wrongly think these conservative, steady-Eddie buys are tapped out, but they’ve still got plenty of gains (and dividends up to 10%!) ahead.

Earnings and Share Prices Part Ways

I say “levitating market” because we’re seeing stocks soar—up 24% year to date—while that gain doesn’t, at first blush, seem supported by earnings: third-quarter profits are down 2.4% year over year, and have been down for three quarters in a row.

If you stopped reading right here, you’d probably think we’re ready for another recession, because companies’ profits are disappearing. That’s wrong: it just means we’re seeing a divided market, with some stocks up far too much in relation to what they’re actually delivering, while others have lagged their profit potential, resulting in some oversold deals.

The bottom line? Stocks (and CEFs!) are still the best place for your money—you just need to be careful.

Here’s what I mean: while five of the 11 S&P 500 sectors are seeing earnings declines, consumer discretionary and financials declines are pretty modest (1.5% and 3.2% respectively); they’re overshadowed by the huge drop in energy earnings.

Energy in Free Fall


FactSet

At the same time, the sector with the biggest earnings gains is utilities, which makes sense because utilities buy power-producing commodities from the energy sector and sell their services to consumers. If utilities’ inputs are cheaper, their earnings will likely rise.

The Market’s Reaction

 A rational market would respond to this news by rewarding utilities and punishing energy firms. That’s partly what we are seeing, with utility stocks up 16% year to date, going by the price return of the benchmark Utilities Select SPDR ETF (XLU), while energy has gained just 6%.

 But even that relatively small gain in energy stocks is too generous for a sector seeing profits crash by nearly 40%. Meantime, utilities’ 16% climb is relatively modest, and below the S&P 500’s 24% return, despite utilities being the biggest-winning sector. That, in turn, makes the Utilities Select Sector SPDR ETF (XLU) a compelling destination for extra cash, especially with its 3% dividend yield.

Juice Up Your Utilities Dividends

 Of course, we can do much better than that. Of the 10 utility CEFs tracked by CEF Insider, nine pay yields over 6%, and the Macquarie Global Infrastructure Fund (MFD) pays a whopping 10%, if you want to get as big of a dividend stream as you can.

Surprisingly, the market hasn’t paid enough attention to these funds. Four are trading at large discounts to net asset value (NAV, or the market value of their underlying portfolios), making them an intriguing prospect right now.

Contrarian Outlook

What’s more, of the 10 utility CEFs CEF Insider covers, six have returned more than XLU for 2019, based on their total NAV return (or the gains of the stocks in their portfolios, including those stocks’ dividends).

Contrarian Outlook

The best-performing utility CEF, the Cohen & Steers Infrastructure Fund (UTF), has been a monster in 2019, with a total market-price return of 44.1% for the year!

The bottom line is that utilities CEFs are delivering big returns in 2019, while the utilities sector is seeing profits soar. And with so many of these funds trading at discounts and paying outsized dividends now, they’re far better buys than profit-losing sectors like energy.

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