Most investors ignore a clear shot at 7% + dividend double-digit price gains – year over year – in one industry everyone should speak, but is not.
It would be healthcare, which is skyrocketing rising spending: According to the latest figures from the Centers for Medicare & Medicaid Services, healthcare spending in the United States will increase by 5.4% per year, on average, every year until in 2028. (We’ll dive into three funds paying huge dividends up to 8.3% and ready to cash in on that wave in just a moment.)
The problem with this 5.4% annual increase is that it’s a lot 4% higher than expected US GDP growth. However, the market behaves as if healthcare were in its sickbed: the main benchmark ETF for pharma, the SPDR Selected Healthcare Sector ETF (XLV)
I hammered the table on this disconnect in my CEF insider service for quite some time now. And CEF insider members will of course know that we have taken advantage of the growing demand for healthcare with two closed end funds (CEFs) delivering over 8.2% dividends—Tekla Life Sciences Investors (HQL) and Tekla Healthcare Investors (HQH).
Both gave our CEF insider portfolio a solid foundation, with both funds earning around 45%, mostly in the form of dividends, as we bought them in 2017 and 2018, respectively. And as we’ll see later, they have key benefits (including their huge and stable dividends) that set them up for even bigger gains in the next healthcare renaissance.
Tekla is an investment company exclusively dedicated to healthcare with a few CEFs in the market. The company employs a team of former bioengineers and laboratory scientists, and as a result, often learns cutting-edge medical technology before anyone else, which is why it has released some of the most successful CEFs of all time. .
HQH and HQL aren’t the only games in town, either. Here are three others who do not currently sit in our CEF insider portfolio, but are still positioned to take advantage of the growing demand for healthcare. To make it easier for you, I’ve ranked these three choices from worst to first:
CEF Santé # 3: Tekla World Healthcare Fund (THW)
Our # 3 pick, THW, also comes from Tekla, and it shows how even great managers can have strikeouts every now and then.
THW attracts attention mainly because of its 8.6% yield, which is important even for CEFs, which already have a high average yield of 6.8%. THW is a much more global fund than HQH or HQL (or the other two funds we’ll cover below), with leading holdings such as AstraZeneca PLC (AZN), Roche Holding (RHHBY) and Medtronic
They’re all great companies, but when it comes to the pharmaceutical industry, we want to stay focused on the United States, which is the world’s largest consumer of healthcare, with a projected 35% share of global spending. health in 2028, according to Statista.
But even if THW’s portfolio were better aligned with our focus on the United States, we would be put off by the fact that the fund trades with a high premium of 8% to the NAV (NAV, or the value of shares in his portfolio). This big premium could cap the fund’s upside, and THW’s performance history is already a bit weak since its inception six years ago, with a return on total net asset value (or the performance of its underlying portfolio). ) by 41.5%, which is not quite enough to support its payments.
Despite this, THW has a premium as CEF investors often bid on a fund solely based on its performance. We, income seekers against the grain, of course know that we must not fall into this trap.
CEF Santé # 2: BlackRock
The BME, which earns 5% as of this writing, is as close to a “popular” health fund as you will find in the still obscure world of CEFs. There are two reasons for this: one is that it is run by BlackRock, the world’s largest investment firm, with over $ 7 trillion in assets under management, and the other is the portfolio of BME, which is a who’s-who of America’s premier pharmaceutical companies. , including UnitedHealth Group
Best of all, management has made good use of its many strengths, helping BME generate a 635% total return crushing the market since its inception, well above the 467% return offered by the benchmark pharmaceutical ETF, XLV. .
So we have an intelligent management team, almost unlimited research resources with BlackRock, and exceptional performance. Why is this just our second best option? you might be thinking.
The first reason is the dividend: the 5% yield of BME is Okay, better than just about any payment you would find on an individual pharmaceutical action. But that’s still well below the CEF average of 6.8%. The other? Everyone knows BME is the cool kid of the class, which is why it trades at a 2% premium over NAV.
So let’s put BME aside for now (and keep an eye on it until it drops to a big discount) and move on to our first place finisher.
CEF Santé # 1: Tekla Healthcare Opportunities Fund (THQ)
For that, we go back to Tekla, with the 6% yield Tekla Healthcare Opportunities Fund (THQ). Its main holdings are similar to those of BME, with a slightly stronger focus on health insurers such as Cigna Corp
THQ is one of the newer CEFs, and is doing well, with a total return on net asset value of 105% since its inception in July 2014.
But the most exciting aspect of THQ is its price. At a 3% discount, it is cheaper than almost all other healthcare CEFs and less than the average discount of 1.9% for all CEFs. This makes it even more likely that THQ will outperform as its discount goes up to a premium.
“Relative strength” adds to THQ’s appeal
Thus, THQ’s cheaper pricing allows it to outperform, in addition to having a higher return. These are two reasons why he wins out of these three non-CEF insider health care choice. And there’s a bigger reason, too: Anyone taking over THQ would do so now when their portfolio is growing, the perfect time to buy.
When we compare BME, THQ and the benchmark ETF, XLV, based on the return on net asset value, we find that THQ has lagged behind the other two since its inception, but it exhibits relative strength this year, because it is driven by the other two.
Clearly, THQ makes perfect sense and its attractive discount makes it the winner of our trio.
Michael Foster is the Senior Research Analyst for Contrary perspectives. For more great income ideas, click here for our latest report “Indestructible Income: 5 windfall funds with secure 7.3% dividends.“