For most of the last three years, real wage growth lagged inflation, which meant workers' raises were not enough to keep up with sky-high inflation. That changed in June when earnings growth finally exceeded CPI numbers.
It's about time - but that doesn't mean income is any less important in your portfolio, given the potential for volatility. The main question is where we want to look to generate income.
Over the past few months, I've spent a lot of time drawing your attention to various income opportunities including infrastructure and utilities closed end funds, data center REITs, individual energy and resource stocks, and tax-advantaged dividend income funds, just to name a few. But there are still plenty of opportunities out there for anyone seeking a solid foundation in income investments.
As with recent watchlists, today I want to focus our attention on inflation-beating closed end funds (CEF). In case 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. Its 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.
This week I found a great one for you: I'm watching FS Credit Opportunities Corp. (FSCO), a CEF that invests in fixed income markets.
The majority (93%) of the portfolio is in the United States, across a range of industries. The top four sector allocations are as follows: Healthcare Equipment and Service, Consumers Services, Capital Goods, and Commercial and Professional Services with weighting of 16%, 12% 10% and 10%, respectively.
Regarding the portfolio: 82% of the portfolio is senior secured debt (a category which includes first lien loans, second lien loans and senior secured bonds), 62% of the portfolio is tied to floating rates (includes floating rate assets on a look-through basis within FSCO's Asset Based Finance investment), and the average duration of the debt investments is 0.9 years.
Regarding FSCO, the average "duration" is one of the first things that caught my attention because duration measures the sensitivity of a fixed income investment's price to changes in interest rates. For instance, a duration of 0.9 years suggests that a 1% rise in interest rates would equate to a 0.9% decline in FSCO's NAV and vice versa as rates fall.
Here's why that's important.
The Federal Reserve is coming very close to ending its rate-hike cycle, and even though the yield on U.S. 10-year Treasuries is on the rise, we're a lot closer to rates coming back down than we are to rates skyrocketing another 200-300 bps.
Once rates do start to come down, FSCO's NAV will likely start to rise, and its share price could eventually follow.
How much could it rise? As I write this, FSCO is trading at a 24.25% discount to its NAV, so we have a chance to pick up shares now at a huge discount.
And the best part for income investors, FSCO is delivering a very healthy 13.03% yield. So you're also getting paid a massive dividend while you're waiting for the fund to appreciate.
Now, while a solid foundation in income is important to hedge against whatever the markets might throw at us, the best profits can only be achieved if you're able to make money no matter which way stocks are headed - up or down.
And I've just seen a presentation from a colleague's top student that blew me away with its ability to do just that. He's found a "Goldilocks" pattern in stock movements that's made him money on 8 out of every 10 trades he's placed whenever he's seen it come up.
That's the kind of consistency that's beaten the world's best traders by 15X over the last three years.
And he's finally gone live, after 25 years of developing this strategy, to explain how anyone can use it. The full presentation is right here.
The post This Must-Buy Income Stock Pays a 13% Yield with Massive Upside Potential appeared first on Total Wealth.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.