2 High Yield CEFs To Beat Inflation Now, Deflation Later
I'm LongbridgeAI, I can summarize articles.Investors are presented with a 10.3% average dividend opportunity from two closed-end funds (CEFs) amid rising inflation. The strategy involves securing high yields now while anticipating falling interest rates in the future. The DoubleLine Income Solutions Fund (DSL) offers a 12% payout, while the BlackRock Health Sciences Term Trust (BMEZ) provides a 9.3% yield. Both funds are currently trading at significant discounts to NAV, making them attractive investments as AI advancements and economic conditions evolve.
Last week’s hot inflation reports have handed us a timely “two-step” 10.3% dividend opportunity. We’re going to jump on it today.
Here’s our plan:
- Step 1: We grab a 10.3% average dividend now, to fend off rising inflation, then …
- Step 2: We ride along as interest rates fall, driving up the value of the two funds behind that steady 10.3% divvie.
I know, I know. How can I be talking about falling rates at a time like this?
The Strait of Hormuz is closed. Oil is at $100. And last week saw two hot inflation reports: CPI hit 3.8% in April, and the PPI (producer price index) soared 6%.
I’ll get to that in a second, but let’s start with Step 1: that 10.3% average yield. It comes from two closed-end funds (CEFs) that have seen their discounts to NAV drop to, frankly, ridiculously low levels.
One is a 9.3% payer trading for 10.8% below NAV (or the value of its portfolio). The other is a 12%-paying bond fund whose price falls when rates (and rate fears) rise. But—and it’s a critical “but”—this fund’s yield rises at the same time.
Irrational worries have both funds at “peak yield” right now. We want to lock those in before rates fall. Which brings us to Step 2.
AI Enters the Chat
In the longer run, rates will fall.
For one, this war will eventually end. Neither country can afford to have it drag on. An agreement will reduce inflation. And we can be sure new Fed chair Kevin Warsh will push for rate cuts the first chance he gets.
This is just the opening act in the rate story, though. AI is the headliner.
We haven’t been talking about it as much these days, but the robots are taking jobs: According to research by Goldman Sachs (GS), AI is eliminating roughly 16,000 jobs a month. As that continues, it’ll weigh on inflation.
Wage growth is sagging, too.
In April, it was 3.6%, below the 3.8% CPI print. When price gains outrun wage gains, consumers cut back, putting more downward pressure on inflation. The cure for high prices is high prices!
Funny thing is, little of this has registered with investors. Which makes now the time to lock in our 10.3% payout, before they wake up to the facts here. Let’s start with …
CEF #1: 12.0% Payouts From a Manager With “Swagger”
The DoubleLine Income Solutions Fund (DSL) is a holding of my Contrarian Income Report service. It trades at a 4.5% discount to NAV as I write this—a level we haven’t seen this consistently since late 2022, when inflation hit 8%!
That’s ridiculous for a fund run by the “Bond God,” Jeffrey Gundlach, who’s got a wide mandate to scour the credit market. The discount’s pullback has also pushed the yield up to that sweet 12%.
DSL also pays monthly, and held its payout steady through the 2022 dumpster fire (a year Gundlach capped with a special dividend—talk about swagger!)
This one is a textbook contrarian play on the herd’s inflation panic. We’re happy to take the other side of the argument, especially with dividends and discounts as high as these.
CEF #2: A 9.3% Pharma Payout AI Is Coming For (in a Good Way)
The 9.3%-paying BlackRock Health Sciences Term Trust (BMEZ) sports a discount in the “sweet spot”—down in the last year (thanks to tariffs and RFK Jr.), but on the mend now.
We can thank AI for our opportunity here. As we’ve written before, the tech is set to slash drug-development times, adding billions of sales for drug stocks like BMEZ holdings Merck & Co. (MRK), Moderna (MRNA) and Gilead Sciences (GILD).
That’s not priced into BMEZ, with its 10.8% discount well below its year-ago figure of 3.5%. Management did cut the payout last fall—another reason why BMEZ is in the doghouse.
But that cut shifted the payout from a floating rate to a fixed $0.11 a share monthly. And the fund still offered a high 9.3% yield after the cut—same as today. BMEZ traded at a roughly 11% discount then, too.
In other words, we’re paying the same as we would’ve right after the cut for a safer, more predictable payout. And again, AI’s impact on drug development isn’t fully priced in. That makes now the time to buy.
With BMEZ and DSL, we’ve got a 10.3% average yield, with dividends paid monthly. That’s a big help in offsetting inflation in our day-to-day lives. Plus, their wide discounts line us up for upside as rates fall and AI productivity gains kick in.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.2%) — Practically Forever.