This 13.5% Dividend Yield Makes a Compelling Case for Income Investors

The midterms are here—and we contrarians are voting for 13.5% dividends.

The payout we’re going to discuss today isn’t just well into double digits—it also has a history of rolling out, like clockwork, through all sorts of political mayhem.

It’s the ultimate “Alka-Seltzer” divvie for election-season heartburn. And it’s exactly what we need now.

This 13.5% dividend comes from a closed-end fund (CEF) called the DoubleLine Income Solutions Fund (NYSE:DSL). It’s a holding of my Contrarian Income Report service that recently marked its 10th year in our portfolio.

DSL just hit another milestone, too: It “paid back” our buy price in dividends alone.

I love this story. Here’s how it goes: When we bought DSL in April 2016, we paid around $16.92 a share. Since then, we’ve been quietly collecting our payouts every month, with each one “paying back” a small slice of our buy price.

Last Friday, October 30, we collected our latest dividend, which pushed our total payouts collected to $17.03, passing our initial buy price. That means everything we earn from here—and DSL’s total return has been 73% for us at this point—is gravy!

Let’s take a closer look at this “politics-tested” payout, which has rolled in steadily for nearly six years now.

(DSL honcho, and so-called “Bond God ,”Jeffrey Gundlach did adjust the payout lower during COVID, in late 2020. That was smart risk management. And DSL still yielded 8% post-cut and let us buy Gundlach’s portfolio at a 6% discount to NAV—94 cents on the dollar!)

Since then, we’ve been through the 2022 midterms, the 2024 presidential election and the run-up to this vote. DSL’s payout? Smooth as glass. Investors even bagged a special dividend at the end of 2022—the second-biggest in DSL’s history, following its biggest-ever in late 2021:

Pre-COVID? Same story: The fund’s payout drip, drip, dripped into shareholders’ accounts every month from its inception in 2013.

Here’s where things really get interesting: Right now, DSL is available at a 9.7% discount. That’s cheaper than it was after the 2020 cut. It’s cheaper than the fund’s three-year average discount of 1.7%, and it’s well below the 6.1% discount averaged during the “bond massacre” of 2022.

That’s way overdone, and it comes at a time when the recent bond panic is easing. After streaking north of 5.3%, the yield on the 10-year Treasury note is back down around 5%.

In addition, the MOVE index—a measure of bond-market volatility—has dropped:

Now compare the above chart to the movement (or lack thereof) in DSL’s discount in the last month:

The picture these two charts paint is clear: Fear is cooling in the bond market—but DSL’s “discount window” remains wide open.

To be sure, there is some risk here. For one, 79% of DSL’s portfolio is below investment grade. That’s how the Bond God pays us that gaudy 13.5%. But it’s a risk we’re well paid to take. Plus we’ve got a (still) humming economy backing us up, with Q3 GDP coming in at a better-than-expected 3.4% last week. That helps borrowers keep the bills paid.

And, of course, with any bond there’s the risk that rates will rise, and the resulting higher-yielding bonds will lower the value of DSL’s current holdings.

But 53% of DSL’s portfolio is in bonds with durations of zero to three years, with a further 23.1% at three to five years. That gives Gundlach the flexibility to turn over the portfolio in response to higher rates, while still being able to lock in today’s high yields for the next few years.

Leverage? Again, the Bond God is playing it smart, borrowing against 22% of the portfolio. That’s enough to generate meaningful returns without driving costs up too much if rates rise.

Finally, with DSL (and all CEFs), we can add downside protection by demanding a discount. And boy, is DSL giving us one now!

So whoever wins today, we can take solace in the fact that DSL’s monthly payout has kept rolling in through every vote since 2020. And right now, investor worry (over many things, including politics) is giving us a chance to buy DSL for 90 cents on the dollar. We’ll happily cast our vote for that!

Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."