[ad_1] Businessman uses a wheelbarrow to pour stacks of money banknotes into the cliff getty Donât fall into the trap of thinking you canât beat the market. Itâs total nonsenseâand that goes double if you look outside stocks, to other assets. Consider preferred stocks for exampleâtheyâre âbond-stockâ hybrids that trade on an exchange, like stocks. But like bonds, they trade around a par value. The best part is the income. Our favorite way to buy preferredsâthrough actively managed (weâll come back to that in a second) closed-end funds (CEFs)âgets us yields of 7%+. And select preferred-stock CEFs trade below their net asset value (NAV, or the value of their portfolios) todayâwith some of those discounts reaching well into double-digits. Finally, preferred stock CEFs beat their benchmarks all the time, a fact weâll see in action momentarily. Preferred-Stock CEFs: Proven Benchmark Beaters (With Big Yields, Too) Academics call the idea that you canât beat the market the âefficient market hypothesis.â In 2013, Eugene F. Fama, the economist who first made the hypothesis in its modern form, won the Nobel prize for his work on this theory. He won it alongside Lars Peter Hansen, who did a lot of the heavy math supporting Famaâs hypothesis. Hereâs where this story gets weird. Fama and Hansen shared the Nobel prize with a third winner that year, Robert Schiller, the Yale economics professor who has argued markets are not efficient and often create bubbles, as we saw during the dot-com crash of the 1990s and the subprime-mortgage crisis of the 2000s. How can economists who ardently disagree with each other win the same esteemed prize in the same year? It shows just how messy investing can be. In fact, markets arenât fully efficient, and we often see fund managers beat their benchmarks for a long period of time. Preferred-stock CEFs are a perfect example of this. If we look at those that have had a lifespan of a decade or more, theyâve all beaten the passive iShares Preferred & Income Securities ETF (PFF) in the past decade. Preferred Stock CEFs Outperform Ycharts I know thereâs a lot going on in this chart, but we can see that PFF, at the bottom, is far behind even the worst-performing of the preferred-focused actively managed CEFs, the Nuveen Preferred & Income Opportunities Fund (JPC), which had a much greater 62.9% return. At the top end, the John Hancock Premium Dividend Fund (PDT) nearly doubled the indexâs performance. Also, itâs worth reiterating the massive income streams these funds offer, with yields of 8.5% on average, versus PFFâs 6.5%. And then there are those discountsâanother inefficiency we contrarians can exploit. Preferred Stock CEFs Contrarian Outlook Of these preferred-stock focused CEFs, over half sport discounts, and the Flaherty & Crumrine Preferred Securities Income Fund (FFC) has the deepest discount of them all, with a market price over 11% below its portfolio value. Thatâs probably because of its relatively low (for a CEF) 6.9% dividend yield. But it also means investors who buy now and wait for the market inefficiency to end can earn some capital gains on top of that impressive income stream. And donât think FFC wonât trade at a premium eventually: it has done so many times in its more than 20-year history. As recently as 2021, the fund was trading for more than its assets were worth. For a bigger yield, look to the John Hancock Premium Dividend Fund (PDT) and its incredible 9.1% payout, which also trades at a rare discount. PDT once traded at a more than 20% premium, and double-digit premiums havenât been unheard of in recent years. The recent selloff has driven it to its deepest discount range in a decade, and we can see in the chart above that this discount is narrowing. Of course, weâve seen head fakes before, like at the end of 2023, so PDT may revert back to a double-digit discount again. But that would be a reason to buy more. Just look at what wouldâve happened if youâd bought four months ago, the last time PDTâs discount fell to double digits: PDT Total Returns Ycharts All of this while collecting a 9.1% dividend yield! If thatâs not reason to go from passive to active, then I donât know what is. Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report âIndestructible Income: 5 Bargain Funds with Steady 10.9% Dividends.â Disclosure: none [ad_2] Source link Post navigation Will Malcolm, 60, and Laura, 57, run out of money because they retired early? 4 unexpected investing lessons from 7-year-old learning to solve Rubik’s cube