Score an 11% Yield at a Discount on This Superb Income Play

|September 13, 2023

August inflation numbers came in today, with the Consumer Price Index rising 0.6% over last month and 3.7% over the prior year. This number was slightly higher than economists’ forecasts of a 3.6% increase. On a “core” basis, which strips out food and gas, prices in August climbed 4.3% over last year, marking a slowdown from the 4.7% annual increase seen in July.

The August numbers don’t fully factor in higher oil prices, which have already risen nearly 13% since August 23, 2023. The Fed will be closely monitoring this, since energy is a huge component of the headline number. Even with energy stripped out, the core numbers are still more than double the Fed’s projected levels of 2%.

Given the higher energy costs and persistently higher-than-targeted inflation, I expect the Fed will likely maintain higher rates for a longer period, making it as important as ever to have income in your portfolio.

One of my favorite methods for generating income is through closed-end funds (CEFs). If you’re not familiar with CEFs, they are a type of mutual fund that issues a fixed number of shares through a single initial public offering (IPO) to raise capital for its initial investments. These shares can then be bought and sold on a stock exchange, but no new shares are created, and no new money flows into the fund.

Because the fund’s market value can fluctuate just like an individual stock, there are opportunities to purchase shares of a CEF at a discount to the net asset value (NAV). Combine high-yield income with the ability to purchase shares of CEFs at a discount to their NAV, and CEFs become an attractive choice for investors seeking a professionally managed, income-producing portfolio.

This week, I’m keeping an eye on the BlackRock Health Sciences Term Trust (BMEZ), a closed-end fund that, under normal market conditions, invests at least 80% of its total assets in equity securities of companies principally engaged in the health sciences group of industries, and in equity derivatives with exposure to this group. The Trust utilizes an option-writing (selling) strategy to generate current gains from option premiums and enhance the Trust’s risk-adjusted returns.

As the name suggests, BMEZ holds a portfolio of equities tied to health science, with 59.3% of the portfolio invested in Pharma, Biotech, and Life Science, and 37.65% invested in Health Care Equipment and Services. The fund maintains 179 positions, with Alcon AG (ALC), Vertex Pharmaceuticals Inc. (VRTX), Align Technology Inc. (ALGN), West Pharmaceutical Services Inc. (WST), and Argenx SE (ARGX) being the top five holdings, comprising 3.07%, 3.05%, 2.52%, 2.42%, and 2.33% of the portfolio, respectively.

Currently, 24.02% of the portfolio is “overwritten,” representing the portion of the portfolio covered by written call options, utilized to enhance portfolio returns. Speaking of returns, BMEZ is currently trading at a significant 17.3% discount to its NAV and offering a substantial 11.7% yield.

That means you’re getting paid while you’re waiting for BMEZ to appreciate. I think that’s a win-win situation anyone can (and should) get behind.

Shah Gilani
Shah Gilani

Shah Gilani is the Chief Investment Strategist of Manward Press. Shah is a sought-after market commentator… a former hedge fund manager… and a veteran of the Chicago Board of Options Exchange. He ran the futures and options division at the largest retail bank in Britain… and called the implosion of U.S. financial markets (AND the mega bull run that followed). Now at the helm of Manward, Shah is focused tightly on one goal: To do his part to make subscribers wealthier, happier and more free.