A relatively quiet month…trimming CEFS because it grew too large, and adding some Gold on a dip.
Current Portfolio yield is 11.5%.
Trades
Reduced CEFS (from 6% to 5%)
The 7.3% yield is less than I’d like, but CEFS made up for that recently with price appreciation. “Trim CEFS if it reaches 6% of the portfolio” is what I said in last month’s edition....and it did!
This “fund of funds” is one of my favorite investments because it combines widespread diversification with SABA Founder Boaz Weinstein’s active investor approach. They buy closed end funds at a discount to Net Asset Value, pursue strategies to increase the price (eg. getting seats on the board of the fund to make investor-friendly policy changes), then sell at a profit.
“Don’t fall in love with an investment”
As much as I like (or love) this fund, my 5% cap on individual investments is intended to minimize the damage any one investment can do to my portfolio. So I trimmed it from 6% back down to 5%. If you want to learn more about this fund (vs its competitor, FOF), here’s a recent review of CEFS.
Increased KGLD (from 3.4% to 4.4%)
GOLD is off its January all time high so I’m adding to the position. Kurv’s website quotes a yield of 17.5%, but gold (and the distributions) are so volatile that the KGLD yield is a moving target. The recent $0.45/share distributions were nice, but they were the result of an unusually strong surge in the price of gold. To remain conservative, I’m assuming a long term yield of 10 to 12% and distributions in the range of $0.30/share as explained in this recent KGLD update.
To some extent, shifting funds from CEFS to KGLD is an increase in risk (and yield). CEFS has a more consistent distribution history, and is well diversified. However, for KGLD’s yield to decrease to CEFS’ level of 7.3%, would require the price of gold to drop by more than 30%. That’s possible, but a risk I’m comfortable with.
I’m not a gold trader or speculator, and avoided gold for years because it doesn’t produce income. Now that we have access to a fund that uses options to convert the volatility and some of the appreciation into a juicy yield, it has become a viable option for an income investor. This purchase isn’t based on a near term prediction about the price of gold. I simply want to build a position to hold for the long term, and the recent dip is an opportunity to continue that process.
Finally, KGLD is one of the few covered call funds that’s been able to keep up with its underlying asset (Gold). See below for a chart comparing KGLD to the price of Gold (represented by GLD) and its largest competing Gold Income Fund, IGLD. No daylight between KGLD and Gold.
How does KGLD capture the full upside of Gold’s price appreciation?
Howard explained the fairly complex options formula in a recent interview, see below. (KURV Founder Howard Chan’s full 34 minute breakdown of the KGLD option strategy has been uploaded to the Armchair Insider Lounge.)
KGLD has kept up with its underlying asset, Gold (as represented by GLD)
What About Other Low Yielders?
IDVO, NML, UTF, EMO, and MAIN are at the low end of my target range of 8 to 12%. Why not trade them for higher yields?
IDVO’s 5.5% yield is relatively low, but it’s challenging to find high yield AND exposure to global markets. NIHI’s 10% yield is a good solution, but it’s new and it’s built on an index. Beyond the exposure to Non-US Dollar denominated assets, IDVO’s active portfolio management has also provided growth.
IDVO’s price appreciation made up for the low yield
NML and EMO offer exposure to a basket of Midstream companies and partnerships. Their yields have fallen recently because the energy sector has benefited from the Iran war (ie price appreciation). You could argue that the valuations of the holdings within their portfolios have become a little rich, but surprisingly, both continue to trade at a discount to their Net Asset Value.
Eg. EMO is currently priced at 12.96% below its NAV. This means 1/ There’s room for appreciation if demand for the fund increases (even if the value of the portfolio remains constant) and 2/ The fund doesn’t have to work as hard to generate its 8.2% yield. It only needs to generate a yield of 7.1% on its assets, for investors to receive 8.2% (because they’re buying the fund at a discount).
EMO is trading at a discount to the assets in its portfolio
Data from CEFConnect shows that EMO needs to generate a 7.12% yield on its assets to deliver an 8.2% yield to investors.
For UTF, the utilities fund yielding 7.1%, the discount is 6.3%. During the past 5 years, UTF has often traded at a premium to its NAV. The current 6.5% discount is therefore relatively attractive.
Compared to its 5 year history, the current UTF discount is attractive
MAIN Street Capital is the most expensive Business Development Company (BDC), but also the best. The yield is in the 6 to 8% range, depending on whether you count the supplemental dividends. Why accept a low yield?
The long term history shows its ability to deliver outstanding total return (price appreciation plus distributions reinvested).
MAIN is never cheap, but at 1.5 x NAV or below, the valuation has become more attractive relative to past valuations. If you’d like a detailed update on MAIN’s dividend coverage and recent earnings results, check out this analysis by Cain Lee.
MAIN’s Total Return (ie including price appreciation) makes up for it having a lower yield than its BDC peers.
Price vs NAV is starting to look more attractive at these levels
Recent Videos
(Published Since the Last Edition of Armchair Insider)
Armchair Insider Portfolio
Click to View Portfolio for May (New Format)
Basic Resources
Dividend Tracker: Snowball
Primary Research Tool: Seeking Alpha
How I Use Seeking Alpha to Find Income Stocks/Funds: Video Tutorial
Closed End Fund Database: CEF Connect
Advanced Resources
How to Buy Preferred Shares: 67 Page Guide to Preferred Shares
Preferred Stock Profiles (Rates, Call Dates, etc): Quantum
BDC Weekly Insights Report: Raymond James
BDC, Preferred Stock, & Bond News, Portfolios, and Trades: Systematic Income Investing
Thanks for stopping by…see you in the next issue!
Regards,
Armchair Income
Disclaimer: I’m sharing information about my investments, but I’m not making any recommendations to you to buy or sell anything. Each investor has their own goals, risk tolerance, and timeline, and must make their own investments decisions…then take responsibility for those decisions. I’m not a financial advisor, and I don’t advise anybody regarding their investments. If the information in this newsletter is useful or helpful in any way, then my goal is achieved :) Some of the links provided above may be associated with affiliate programs. If so, use of those links will not incur any additional cost to the user (and will, in many cases, provide a benefit to the user) and may result in a referral commission to this newsletter.
