Would you be interested in owning stocks like Microsoft (MSFT), Apple (AAPL), JP Morgan Chase (JPM), and Amazon (AMZN) — and getting an 8.0% income yield? asks Steve Mauzy, editor of Dividend Confidential.
Yes, the four blue-chip behemoths are top-10 holdings of Virtus Dividend, Interest & Premium Strategy Fund (NFJ), our latest recommended closed-end fund (CEF). Virtus is a $1.3 billion CEF that holds a diversified portfolio of blue-chip and large-cap stocks and convertible securities.
The portfolio is composed of 77% of the former and 22% of the latter. (Convertible securities are preferred stock or debt that are convertible into the underlying stock. Both pay a fixed income.) The fund owns 219 stock and convertible issues.
Virtus fund checks all the boxes: high-yield income, a steep discount to net-asset value (NAV), an exceptional z-score, and exceptional value.
The fund pays $0.98 per share annually. The distributions are paid quarterly at $0.245 per share, after being increased 8.9% at the beginning of the year. (This is always a good sign for a closed-end fund.) The distribution generates a generous 8.0% yield on investment.
Price relative to value is another eye-catcher. If you’re familiar with our Shadow Fund investment theme — our name for closed-end funds — you know that it’s all relative. We pay close attention to relative discounts and relative premiums, particularly relative discounts.
If the relative discount is greater than the historical average discount, a buy opportunity could be emerging. If the relative discount exceeds the historical average by a wide margin, a buy opportunity has emerged.
The Virtus fund shares are priced at an 11.2% discount to NAV. The shares were trading at only a 6.6% discount earlier in the year. Relatively speaking, the discount is significant. Think of it this way: you're buying a diversified portfolio of the largest, most established U.S companies at eight-nine cents on the dollar.
Sticking with the relative-value theme, the Virtus fund’s z-score further buttresses our buy recommendation. The z-score is a statistical measure of value. It tells you the value today compared to historical value. The higher the z-score, the less appealing the value proposition.
Here, we seek the negative. The more negative the z-score, the more positive the value proposition. The Virtus fund’s one-year z-score is exceptionally negative at negative one (-1). The three-year average is zero. (Again, the more negative the z-score, the better.) The Virtus fund is exceptionally priced for investment today.
History has shown that buying when everyone is selling is the best time to buy and profit from a closed-end fund. I expect the Virtus fund to adhere to form. Buy the Virtus Dividend, Interest & Premium Strategy Fund at market.
