Close up Benjamin Franklin’s face portrait wearing funny cool pixel sunglasses on 100 dollars bill banknote, black and white style. Money cash, financial background. One hundred dollar banknotes.
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It never ceases to amaze me how many investors confuse investing with straight-up gambling.
Of course, we income investors know that gambling is a one-way ticket to losses (the house always wins, after all!). That’s why we always focus on long-term wealth creation (and a solid income stream) at my CEF Insider service, whose portfolio yields nearly 10% on average as I write this.
Nonetheless, with stocks having soared the way they have, it’s easier, even for normally prudent investors, to get caught up in dangerous speculation. That’s especially true when gambling seems to be everywhere these days.
Even though—a funny aside—gambling actually hasn’t grown as a percentage of Americans’ earnings in the last 25 years. It amounted to seven-tenths of every dollar earned in the US in the early 2000s, and it’s been around that level since.
The fact that it feels like it’s everywhere nowadays is a testament to the marketing power of the gambling companies!
Gambling Growth
Federal Reserve
But I digress. Let’s get back to the stock market, which is always happy to feed the cravings of degenerate gamblers with all kinds of financial nonsense, including meme stocks, Bitcoin treasury companies, obscure cryptocurrencies and more.
The first fund we’ll talk about below is a prime example. An early tip-off that it’s to be avoided: It’s a rare closed-end fund (CEF) that doesn’t pay a dividend. (For an asset class that yields 8% on average, this fact alone should stop us dead in our tracks.)
Then we’ll look at a second fund that sounds like a gamble, with its high 9.9% dividend, but in fact is a prudent long-term investment (and a bargain, to boot.)
This Fund Is the Meme Stock of CEFs
Let’s start with that CEF “gamble” to be avoided at all costs: It’s known as Destiny Tech100 (DXYZ). This first chart tells us that plenty of people have already rolled the dice, and lost, on this one this year:
This fund is down 63% since the start of the year, as of this writing. That may not surprise you if you saw my articles warning against DXYZ in February, April and May, because it was way overpriced at those times.
In fact, this fund had over a 500% premium to net asset value (NAV, or the value of its underlying portfolio) earlier this year. In other words, investors were willing to pay $5 for every dollar of DXYZ’s assets.
Meantime, as I write this, the average CEF sports a discount of 5.3%, or trades for 95 cents on the dollar, in other words.
As of today, to be fair, DXYZ’s premium has come down: It’s now “just” 96%, so you’ll be paying a bit less than $2 for every dollar of assets. Still not exactly a bargain.
In case you’re wondering how this is possible, it’s because DXYZ has filled its portfolio with risky private equity plays, including holding 23.3% of its portfolio in SpaceX and a smaller share in OpenAI.
Those two names alone likely go a long way to explaining DXYZ’s high premium. Its other holdings are also highly speculative—and even if they do go on to be tomorrow’s Magnificent 7, we’re already on the back foot, since we’re paying 2X their value just to get exposure to them through DXYZ.
So we’re left with a CEF that pays no dividend, is down 63% this year, trades at a 96% premium and is exposed to highly speculative private equity investments. That’s the very definition of a gamble.
A 9.9% Dividend That Could Have a Place in Your Retirement Portfolio (And Not A Meme Stock!)
Which brings me to the BlackRock Technology and Private Equity Term Trust (BTX), which many people will tell you is a speculative play based on the size of its dividend alone: a 9.9% payout that comes your way monthly.
This fund is a former holding of my CEF Insider service—we booked a nice 16% return on it when we held it from late April to late August of this year—and it’s on my radar again.
BTX invests in tech, like DXYZ, but focuses on publicly traded stocks that provide infrastructure. NVIDIA (NVDA) is 10% of the portfolio, and Celestica (CLS), which helps companies manage their supply chains, is 3.5%. Lesser-known (but still important) stocks like cloud-computing firm Snowflake (SNOW), factor in here, too.
Now it is true that BTX’s dividend has moved lower in recent months, but that’s because the fund switched to a new management team, which has been gradually adjusting the payout after the previous group boosted it to make the fund look more appealing as tech was recovering from the 2022 selloff.
That’s actually a good setup for us, as it makes our 9.9% payout (yield calculated on a forward basis) more reliable. Beyond that, we’ve got a sudden discount to work with, thanks in large part to the tech-led selloff.
BTX Discount to NAV
Ycharts
Not just that, but as you can see above, the current 14.9% discount is the widest it’s been in a couple of years.
There’s a simple reason for this: Investors are focused on the short-term tech selloff and ignoring the fact that this fund’s underlying portfolio (or its NAV, in other words), has been rolling—matching the S&P 500 (which is no mean feat for a 9.9% payer like this) since stocks’ recovery began in earnest in May.
In light of that, this fund should be moving toward a premium, but as we just saw, its discount is actually getting wider.
That’s not unusual for a CEF: The market is slow to respond to strong performances like this because few people pay attention to these funds.
In fact, to come back to our gambling theme for a moment, that widening discount is a good thing: It’s proof positive that this CEF is not attracting speculators.
And finally, as mentioned, a 9.9% yield on a fund that’s matching the market is nothing to sneeze at, since it’s delivering those gains in safe cash dividends. When investors realize that, I expect them to bid that discount back toward par, driving further price gains (and potential overperformance) as they do.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great retirement income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 8.9% Dividends.”
