3 Unbelievably Cheap High-Yield CEFs

These three little-known funds yield up to 13.5%—and their payouts are actually safer than they’ve been in years, thanks to the Fed-induced selloff.

Now is the time to buy them. Patient investors who do so will be nicely set up for annualized returns north of 14% in the long run, with most of that gain in dividend cash!

These three timely buys—all closed-end funds (CEFs)—are winners now because they let us buy stocks (and real estate, in the case of one of the funds we’ll discuss below) at a rare double discount: one discount on the CEF itself and another because investors have oversold many of the investments these funds hold.

To get a sense of the gain potential on offer here, let’s look back a decade, to late 2012, when the market was in its fourth year of recovery from the subprime-mortgage crisis. The brave few who bought that dip saw spectacular returns.

With 14.3% and 18.9% annualized returns, respectively, the S&P 500 and NASDAQNDAQ
returned huge profits for those who went against the talking heads and clickbait headline writers.

Of course, if you buy this dip, you might have to wait for profits to appear: those who bought in 2009 saw returns almost instantly, but the really big money took years to show up. And if this selloff lasts longer than that one, we’ll need an income stream to tide us over.

Fortunately, the three CEFs below give us that, with yields up to 13.5% and investments in three sectors set to bounce as markets (inevitably) recover.

Selloff Pick No. 1: Highland Income Fund (HFRO)

Let’s start with the Highland Income Fund (HFRO), an 8.6%-yielder with two-thirds of its portfolio in rent-producing real estate.

With inflation driving rent prices higher, HFRO’s positions in a variety of properties, including residential, commercial and industrial buildings, sustain its big payouts, since the fund acts as a pass-through that hands off most of its income to shareholders.

Plus, HFRO trades at a 27.5% discount to net asset value (NAV, or the value of the investments in its portfolio). That’s one of its biggest discounts on record, so we’re paying just 72.5 cents on the dollar for this one!

Here’s what’s less understood about discounts like that: they make a CEF’s payouts more sustainable because management only needs to earn enough from its investments to cover the yield on its NAV, or the yield based on its per-share portfolio value. In HFRO’s case, that comes out to 6.2%.

Meantime, we get the yield on the discounted share price: 8.6%! It’s a win for management (because 6.2% is far below current yields on real estate in America) and for us, because we get an 8.6% yield—much higher than the payout on Treasuries and the typical S&P 500 stock.

Selloff Pick No. 2: Neuberger Berman Next Generation Connectivity Fund (NBXG)

Of course, this volatility won’t last forever, which is why we want to pick up the 13.5%-yielding Neuberger Berman Next Generation Connectivity Fund (NBXG) now, while it trades at a totally undeserved 20.5% discount. That markdown exists because the fund just held its IPO in May 2021, and a new fund is an easy target for panicked investors in a selloff.

But that big discount also means NBXG’s yield is actually 10.7% on NAV. This is still relatively high, but it’s a pittance compared to the CEF’s earnings potential. Here’s why.

NBXG’s focus is on the technological infrastructure that powers our tech-dependent world. Companies like Palo Alto Networks
PANW
(PANW) and semiconductor maker Analog Devices
ADI
(ADI) have been the backbone of the tech sector for decades, with massive returns even after the recent selloff hit tech the hardest.

NBXG holdings like these are earning far more than the fund’s yield on NAV. And when the fund’s holdings return to their long-term historical trend, management will not only be able to sustain the payout—they’ll be able to grow it, too.

Selloff Pick No. 3: Neuberger Berman MLP Income Fund (NML)

Let’s round out our three picks with the Neuberger Berman MLP Income Fund (NML). It’s a lower-yielding choice, with a 4.1% payout, but it gets us exposure to the energy sector through master limited partnerships (MLPs), which own oil and gas pipelines and storage facilities. NML has posted a strong 2022, with a 31% return this year.

The fund holds a variety of energy firms and MLPs, such as Enterprise Products Partners (EPD), Energy Transfer LP (ET) and Western Midstream Partners LP (WES). And with the war in Ukraine still unsettled, uncertainty in China and a slow reopening of the rest of Asia from the pandemic, energy supply remains uncertain as demand is beginning to rise.

If inflation keeps hitting fuel prices, we’ll benefit through NML, which passes on profits from rising energy prices to shareholders. And while NML may not be the best long-term hold of our trio (that award goes to NBXG), it diversifies our portfolio for the current market condition, and we’re getting a nice 18.3% discount to NAV. That means management only needs to earn a 3.3% yield to sustain payouts—less than US Treasuries pay now!

Finally, many investors shun MLPs because they send you a complicated K-1 package for reporting dividends at tax time. But when you buy through NML, you can skip that.

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