1 Simple Trick To ‘Magnify’ Your Dividends

Not many people know this, but you can actually “magnify” the return of a regular stock—just by holding it through a closed-end fund (CEF)!

That’s in addition to getting a much bigger dividend than the typical S&P 500 stock dribbles out: 7%+ payouts are, of course, common in the CEF space.

So how does our CEF “gain magnifier” work?

It comes down to what at first blush seems to be a rather obscure fact: CEFs (which trade on the market, just like stocks or ETFs), generally have a fixed number of shares for the entirety of their lives. That means their market price can be different from their per-share net asset values (NAV, or the value of the stocks they hold in their portfolios).

And when you buy a fund that’s trading at an unusual discount, your gains are magnified because, as the discount disappears and flips to a premium, it amplifies the gains the portfolio makes on its own.

Our CEF “Gain Magnifier” in Action

Let’s look at this with a favorite CEF of ours at my CEF Insider service: the BlackRock Science and Technology Trust (BST). It’s a good example because while it’s classed as a tech fund, it mainly holds the biggest companies in the S&P 500, including Apple
AAPL
(AAPL), Microsoft
MSFT
(MSFT) and Mastercard
MA
(MA), so it’s more reflective of the index as a whole than most tech CEFs.

Since the market bottomed on October 11, 2022, BST has returned a healthy 13.9%, part of which was driven by its portfolio of quality S&P 500 names.

Before we go further, let’s note that this fund yields 9.5% and pays dividends monthly, so anyone who bought in October has already collected a healthy portion of the total return above in cash, to the tune of about $80 a month for every $10,000 invested.

And there’s more going on here than just portfolio gains. Part of this strong return was driven by the fund’s disappearing discount: since October 11, its discount has gone from around 5% to roughly par (it even spiked as high as 6.8% in late January).

This isn’t the first time BST’s discount has flipped to a premium: the fund traded at or well above par for most of 2019, 2020 and 2021.

Those premiums were a big part of the reason why the fund strongly outperformed the market in those years. From its IPO in 2014 to 2022, BST returned 352%, as the discount it had from 2014 onwards quickly vanished in 2018.

This chart shows us something else that few people consider about CEF discounts: they can tell us when a fund is getting pricey and it’s a good time to take profits. But at a 0.32% premium, that’s not the case with BST today, even though the fund doesn’t trade at a discount currently.

I often tell people that CEFs compound returns, which might sound a little confusing, but that’s what you’re seeing in this chart. The value of BST’s portfolio (or its NAV, in other words) has risen 8.6% in 2023, but its market price is up 12.4%. That’s because the fund started at less than a 3% discount and is now trading at a small premium again.

Let’s say the market goes up a further 10% for 2023 (a conservative assumption compared to those of most Wall Street bank economists), and BST’s NAV rises the same amount. Now let’s assume BST’s premium rises to the 12% high we’ve seen previously. In that case, its market price would rise 23%, or more than double the market’s gain.

And if we hold BST longer and the market goes up 50% while BST’s premium peaks, our return could actually be 68%, a full 18 percentage points higher than the market. If the market doubles? We’re actually up 124%. And you’re collecting a 9.5% income stream while you wait.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 10.2% Dividends.”

Disclosure: none