Closed-end funds (CEFs) are a top choice for investors looking for income, as they offer high dividends and the potential for significant price gains. By purchasing CEFs that are trading at discounts to their net asset value (NAV) and selling them at par or a premium, investors can take advantage of this strategy to maximize their returns. This simple buy low, sell high approach is based on following the discount to NAV, which is a crucial metric for CEFs.
One example of this strategy in action is the Liberty All-Star Growth Fund (ASG), a growth stock-oriented CEF that holds stocks of all sizes, including well-known companies like Visa and Mastercard. ASG offers an 8.5% dividend yield, which has grown by 50% in the last decade, in addition to price gains. With a 10% discount to NAV, ASG presents an attractive buying opportunity for investors seeking exposure to growth stocks and high dividends.
Another CEF worth considering is the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX), which focuses on technology stocks and offers a 6.8% dividend yield. QQQX, which sells call options on its holdings, has an 11% discount to NAV, making it an appealing choice for investors looking to profit from the tech sector’s performance. Despite the potential for underperformance during volatile times, QQQX has outperformed index funds in the last decade.
These opportunities in CEFs are becoming more prominent due to the Federal Reserve’s actions, which have led to increased disinterest in CEFs among mainstream investors. With the Fed expected to cut interest rates, traditional alternatives like savings accounts and CDs offering 5%+ yields are losing appeal compared to CEFs with higher yields and compounding benefits. As CEFs gain more attention in the market, the current period of larger discounts, like those on ASG and QQQX, is likely to disappear, creating strong profit opportunities for investors who act now.
As interest rates decline and investors seek higher-yielding alternatives, discounted, high-yield CEFs are poised to attract more attention in the coming years. With the Fed signaling future rate cuts, CEF discounts are expected to diminish in 2025, leading to more premiums in 2026 and beyond. Investors who position themselves in discounted CEFs now stand to benefit from this trend, as higher interest in these funds drives prices up and discounts shrink.
With CEFs presenting an attractive opportunity for investors seeking income and potential price gains, the strategy of buying discounted funds with high dividends is gaining traction. As the market shifts towards higher-yielding alternatives and CEFs attract more attention, investors who capitalize on these opportunities now have the potential to earn significant profits in the coming years. By following the lead of successful CEF investors and taking advantage of current discounts, investors can position themselves for success in the evolving market landscape.
