I know this is old news, but I can’t help it. It still blows my mind.
In February, the yield on the Japanese government bond went into negative territory… and it’s been there ever since. As I’m writing this, the yield is -0.06%. That means that on a $100 investment held to maturity, investors are locking in a guaranteed annual LOSS of six cents.
U.S. bonds are at least in positive territory. But the 10-Year U.S. Treasury offers a very uninspiring 1.7%, and it’s hard to find any bond not rated as junk that pays a respectable yield these days.
It makes my head hurt to think about it, but that’s the state of the bond market. We’ve gone from risk-free return to return-free risk.
But of course, this is only if you limit yourself to conventional income generators like bonds. If you’re willing to look a little outside the box, you can still manufacture a very decent current income. It may not be your grandfather’s stodgy, old bond portfolio, but it will pay your bills just as well.
REITs, mortgage REITs and closed-end funds all have something in common: they’re all worth more dead than alive.
Most mortgage REITs and closed-end bond funds trade at deep discounts to their book values. In other words, if you had infinitely deep pockets, you could quite literally buy up the entire company, shut it down, sell off its portfolio for spare parts… and actually walk away with a profit of nearly 20% in some of the most extreme cases.
These are real numbers. Mortgage REITs and closed-end funds are required to regularly report on the market values of their portfolios, and I see discounts ranging from 10% to 20% across the board. These kinds of discounts should never exist in the “real world,” but that’s exactly what we have today.
The pricing with equity REITs (or the ones that hold land and buildings rather than mortgage securities) is a little more complicated since they generally don’t report the current market values of their real estate holdings. Getting current appraisals on an entire portfolio of properties would be prohibitively expensive. But most estimates put the pricing of the REIT sector at a pretty significant discount to the market values of properties it owns.
Again, that’s nuts.
The whole shouldn’t be worth less than the parts. Yet it is.
And you should take advantage of this setup!
In Boom & Bust, we’ve been busily taking advantage of these pricing anomalies. Already in 2016, we’ve added new positions in a solid mortgage REIT and in a health care and senior living REIT, and I expect both to perform well for us this year.
But while we like the opportunities in REITs and mortgage REITs, we see the opportunity in closed-end funds to be extraordinary enough to warrant an entirely new newsletter. That’s why Rodney and I launched Peak Income a couple of weeks ago. Our sole purpose is to find good opportunities in the closed-end bond space.
In the very first issue, Rodney gave subscribers a solid, tax-free municipal recommendation yielding 6.1%. That’s equivalent to a yield of more than 10% for investors in the highest marginal tax bracket. Even better, the fund is trading at a 6% discount to its liquidation value.
I followed that up in the March issue with a recommendation for a REIT and preferred stock fund currently yielding a fat 7.8% and trading at an 11% discount to its liquidation value.
Compared to the income options you’ll find in the bond market, these would be enough to make a yield-hungry investor salivate.
So, in this environment, your job is to abandon the return-free model that has become the standard and return to the risk-free return model. Look to the asset classes I mentioned today… and consider signing up for Peak Income. Researching these asset classes is time consuming – and research you must – so let us help.
Editor, Dent 401k Advisor
P.S. In future editions of Economy & Markets, I’ll share more details about how these asset classes work, and maybe even give you details of some you can consider investing in yourself. Stay tuned!
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