This $9 Stock Crushes Inflation with a 10% Yield

Shah Gilani Nov 28, 2022

There’s a lot of attention being paid to the protests in China around the most recent wave of Covid lockdowns – and for good reason.

If China shuts down its factories again, it will have an impact on manufacturing, and it could once again create shortages of components for products. If that happens, those component shortages could lead to less supply and more demand for goods, which could result in more supply chain inflation.

That’s why we want to keep targeting inflation-beating investments – we’re not out of the woods yet.

This week, I want to talk about Closed End Funds (CEF). They’re a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for their initial investments. The shares can then be bought and sold on a stock exchange, but no new shares will be created and no new money will flow into the fund.

CEFs have incredible potential for high dividend yields. Because they’re professionally managed, they can deploy leverage to push the yield much higher than simply buying stocks or bonds.

And they’re often quite cheap to buy – their value is based on the Net Asset Value (NAV) of the assets in the fund’s portfolio. The NAV of the fund is calculated regularly, and it means that a closed-end fund can trade at a premium or a discount to its NAV.

My favorite pick in this category right now combines an inflation-busting 10% yield with significant price appreciation potential for a double-whammy win.

That fund is Royce Micro Cap Trust (RMT), which is one of the only closed-end funds dedicated to investing in micro-cap stocks.

The fund’s “core approach combines multiple investment themes and offers wide exposure to micro-cap stocks by investing in companies with strong fundamentals and/or prospects selling at prices that Royce believes do not fully reflect these attributes.”

The fund holds a portfolio of 296 stocks with an average market cap of $590.4 million. Of the holdings, no one stock has a weighting any larger than 2.6% of the entire portfolio, and the top 20 holdings account for 27.2% of the portfolio.

I like that a lot because it’s got enough concentration in the top 20 holdings to move the needle, but no single stock has the ability to blow up the portfolio.

As I write this, RMT is paying 10.44% yield and is trading very close to its NAV, around $9 a share, so we’re not overpaying for the yield.

In order to generate the distribution payments, RMT pays quarterly distributions at an annual rate of 7% of the average of the prior four quarter-end net asset values.

It’s pretty straightforward. If the fund managers invest wisely, the net asset value of the fund will increase along with the distribution payments.

And here’s the best part, in addition to the 10.44% yield, the fund itself has significant upside.

The fund is currently trading at $9.08, but it was as high as $11.78 at the top of this year, which was 29.73% higher than where it’s trading right now. Once the stock market does find a true bottom and we get the beginning of a long-term rally, I see micro-caps and RMT pushing well beyond the $11.78 highs we saw in January.

So if you’re looking for an investment that’s delivering a huge yield and has a lot of growth potential, you might want to consider RMT.

Make sure to check back in next Monday, and the following Mondays as well, for more inflation-beating investment ideas.

Until then, have a great week.

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