Because fear of rising rates is common among investors, there’s a hidden trap here: if you react to this worry, you will lose money. Instead, you need a second-level understanding of rates so you can bet against this fear and makemoney. (I’ll also give you 3 great buys that let you quickly and easily pull this off below.)
The clearest way to profit from the market’s absurd rate fear is to buy into assets that have been hit hardest in the latest panic. And right now, that means three sectors: utilities, preferred stocks and real estate investment trusts (REITs).
These are all asset classes that are sensitive (in the short term) to rates, and they also boast large dividends. As a result, first-level investors have sold these off, setting up bargains.
For instance, the CBRE Clarion Global Real Estate Income Fund (IGR) is a closed-end fund (CEF) that holds REITs and trades at an 11.6% discount to its net asset value (NAV) while paying a generous 8% dividend yield. I know that sounds unsustainable, but because of the fund’s discount, fund managers only really need to get a 7.1% return to sustain those payouts—and they’ve been doing that easily over the last few months:
A Safe 8% Dividend
With a 7.2% annualized NAV return, IGR’s dividend looks sustainable in the months ahead, making it an interesting contrarian play on rate fears.
Another contrarian way to grab high income from the rising-rate hysteria is, as I mentioned a second ago, through utilities. And you can get 6.6% income at a 5.3% discount in this reliable “widows and orphans” asset class with another CEF: the Reaves Utility Income Fund (UTG), thanks in no small part to its incredible management team. That’s why UTG has crushed the index fund, the Utilities Select Sector SPDR (XLU) over the last decade:
Beating the Index
Nothing feels better than beating the index while getting an income stream that’s double that of the index (UTG’s 6.6% yield is double the 3.3% XLU pays).
My third way to bet on rising rates is the most contrarian: preferred shares. The Nuveen Preferred & Income Securities Fund (JPS) is down 13.7% in 2018. Even if we add in dividends, JPS is still down 9.2%—on the market.
However, this CEF trades at a huge discount that’s gotten bigger in 2018; its 9.2% markdown is much larger than its average 5.2% discount over the last decade, and this one chart shows why:
Price Falls Fast Despite Stable NAV
JPS’s 9.2% price decline is much larger than its 1.8% NAV decline in 2018, demonstrating the market’s rate-driven (and absurd) panic in selling off preferreds.
That has also helped JPS’s dividend yield soar to 7.9%, far ahead of the 6.9% the fund needs to earn from preferreds to make its payout sustainable. That’s one of the lowest returns this fund has had to earn in a long time, which puts its dividend in the safest position it’s been in quite a while.
Yet the fund has been selling off like it’s a dangerous investment, which makes it a very attractive contrarian opportunity…