The bulk of the gains in the S&P 500 have been focused on a smaller number of big movers that have put on strong gains in the last year, observes Michael Foster, closed-end fund specialist and editor of CEF Insider.
And now, due to the recent pullback, these same stocks have pulled back a little, giving us a nice entry point. And of course, as closed-end fund fans, we know we can get these stocks at a nice "double discount" when we buy through our favorite funds!
Take, for instance, the Adams Diversified Equity Fund (ADX), a long-time CEF Insider holding. Its four biggest investments are four of the five largest companies in the S&P 500 — Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL).
ADX's other top-10 holdings are blue chip US companies with strong track records, including UnitedHealth Group (UNH), NVIDIA (NVDA), Bank of America (BAC) and Berkshire Hathaway (BRK.B). These stocks have pushed ADX (in blue in the chart below) to a solid run over the last decade, easily eclipsing the S&P 500 (in purple) and massively outperforming TIPS (in orange).
ADX trades at a 14% discount to NAV, meaning we can buy all of these great companies for 86 cents on the dollar. And when investors realize that ADX has crushed the market while paying a 7%+ dividend yield in each of the last five years, that discount is bound to disappear, giving us more profits on top of this fund's already-strong portfolio performance.
I recently received a question from a reader on ADX's discount, which, as they rightly pointed out, has been around for a long time. ADX has traded at a discount greater than 10% over the last five years and has been tightly rangebound since the March 2020 crash, around its current 14% level.
Why is a fund outperforming the market and paying out massive dividends stuck with this perennial discount? Having spoken to Adams CEO Mark Stoeckle on a couple of occasions, here's my takeaway: the market punishes ADX because it doesn't offer a regular quarterly (or monthly) payout.
That discourages some investors who want their payout at a more regular frequency. To be sure, ADX's strategy of paying out most of its dividend in one shot (and at varying amounts) isn't for everyone. But if you can look past that, the yields on offer here are staggering: before last year's 15.7% bonanza, it paid 6.8% in 2020, 9.6% in 2019, 12.9% in 2018 and 9.8% in 2017.
As the number of investors drawn to CEFs grows, so too will the number who are willing to set aside their need for predictable payouts in exchange for ADX's high yield. That will help close the fund's discount. This, of course, may take a while, but we don't mind, because ADX's savvy management and strong portfolio are more than enough to power our gains — and dividends — on their own.
