If you’re a dyed-in-the wool dividend investor (like me!), you’ve likely taken a look at the big gains folks are reaping on AI stocks … and resigned yourself to missing out on the whole thing.
After all, most AI stocks, like Alphabet (GOOGL) and NVIDIA (NVDA), yield 0% (or close to it!). And we simply demand a dividend before we buy anything.
The good news is we don’t have to miss out—instead, we’re going to go one floor up from the “first-level” options that most folks buy to the “penthouse” of AI investments: tech-focused closed-end funds (CEFs)!
The beauty of CEFs is that by going with these high-yield funds (8%+ payouts are run-of-the-mill in CEF-land), we don’t have to sell the blue chips we currently own!
That’s because there are CEFs out there—like one of the two I’ll show you shortly—that hold the Microsofts and NVIDIAs of the world. So we just need to “swap” our current holdings of these stocks for these CEFs instead.
Second, we’ll be getting much bigger dividends for doing so—the two CEFs below yield around 10%, and one of them even pays dividends monthly.
And third, many CEFs, including the two below, trade at discounts to net asset value (NAV, or the value of their underlying portfolios). These deals only exist with CEFs, and thanks to them, we can buy these funds’ holdings at bargains that simply aren’t available on the open market.
With that, let’s dive into the two tickers I have for you today: one is a large cap fund holding all the “popular kids” of the AI world. The other is a more aggressive CEF stacked with less-well-known firms either making the hardware AI relies on or lined up to profit as AI makes their operations more efficient.
AI CEF #1: The Best Blue Chip AI Stocks—But With a 10% Yield
On the large cap side, consider the Liberty All-Star Equity Fund (USA), which might seem like a strange fit with AI at first, as it was launched before the Internet was a thing, back in 1987.
Nonetheless, this 10.2% (!) yielder has evolved with the times, handing its investors a 2,900%+ total return in that span.
Today it gives us a direct, high-yield route to the best large caps to profit from AI, with Microsoft (MSFT), Amazon.com (AMZN), NVIDIA (NVDA) and Alphabet (GOOGL) making up four of its top five holdings.
In all, USA holds a weighty 22% of its portfolio in tech, but it’s also got a nice angle on companies that’ll benefit as they integrate AI into their operations, like payment-processing king Visa (V) and asset manager Charles Schwab (SCHW).
USA doesn’t give us a huge “headline” discount, at 3.5%, as of this writing, but as you can see below, it strays into premium territory—sometimes well into premium territory—regularly:
One thing to bear in mind with USA is that it pays dividends at a fixed rate in relation to its NAV (10%), so the amount you receive every year will float a bit. But we don’t care, given the fund’s sterling long-term history. If we have to accept more of our return as price gains every now and then, well, so be it.
AI CEF #2: A 10.3%-Paying Fund for More Aggressive Investors
For a bigger discount and a more aggressive play, consider the Neuberger Berman Next Generation Connectivity Fund (NBXG), which trades 16.7% below its NAV today.
You won’t find the NVIDIAs and Microsofts of the world here. Instead, NBXG’s portfolio is home to stocks like Monolithic Power Systems (MPWR), which makes chips aimed at improving energy efficiency, something systems featuring AI—a notorious power hog—are going to need in spades.
You’ll find other chipmakers (and AI beneficiaries) here too, like Applied Materials (AMAT). Meantime, another top holding, tax-software-maker Intuit (INTU), will only benefit as AI gets integrated into its offerings—as will cloud-based business-management software from ServiceNow (NOW).
NBXG had the bad luck of launching in the summer of 2021, just before tech’s 2022 faceplant. But it’s performed well since, posting a 46% total return since the start of 2023.
That leaves us with a sweet setup: a fund with momentum that’s still well below its IPO price a little less than three years ago. Yet it still trades at that sweet 16.7% discount. And despite NBXG’s focus on more aggressive companies, it pays dividends monthly.
That high payout is thanks in part to the fund’s strategy of selling call options on its portfolio. That helps support the dividend because NBXG keeps the “premiums” it collects from these option buyers, regardless of whether they exercise the rights they purchase (which let them buy the fund’s stocks at a fixed price and at a fixed future date).
Finally, the coming interest-rate drop should help both of the CEFs we just talked about, as lower bond yields cut their cost of capital and send investors on the hunt for bigger returns.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none