'Hunkering Down' To Weather The Storm With John Hancock's Financial Opportunity Fund

Summary

• BTO has cranked out an average total return for investors of 8.75% since its inception in 1994; 10.9% for the past 10 years.
• Now its price is down 42% from the pre-pandemic high, about a third more than its underlying holdings, whose prices are down 32%.
• Meanwhile, BTO's distribution hasn't budged (nor have those of most of its holdings), driving its current yield to over 10% from its pre-pandemic 6%.
• Attractive as BTO looks to me as part of a conservative, "hunker down" holding for times like these, some may wish to avoid common stocks completely.
• For them, preferred stock funds may offer an even more appealing opportunity to take advantage of low prices in the financial sector (and utilities as well), but a step higher in the capital structure.
• Looking for more stock ideas like this one? Get them exclusively at Inside the Income Factory. Get started today »

[NOTE: This article includes information discussed previously with the members of our Inside the Income Factory group, in two articles last week.]

I have been a big fan of the John Hancock Financial Opportunity Fund (BTO) for many years, but its distribution yield, around 6%, never excited me all that much. But the fund, currently beaten-down in price but looking strong in terms of its portfolio and-cash generating ability, is still making the same distribution payment it always has. Except, now it represents a 10% distribution yield at its current price.

BTO, whose symbol used to stand for "Bank & Thrift Opportunities," started out years ago investing in smaller regional banks and thrift institutions and eventually morphed into a fund specializing in major money center banks as well as regional institutions. It has a long history by closed-end fund standards, starting out in 1994, and its sponsor, John Hancock, has a terrific history and reputation. BTO has a total return average of almost 9% since inception and an impressive 10.9% for the past ten years.

I began to take a closer look at BTO recently as I searched for candidates for my "Hunker Down" portfolio. The goal was (and still is, since like many of my Income Factory portfolios, the "Hunker Down" model is a work in progress) to find funds that have a high likelihood of continuing to make distributions through "thick and thin" as we face the economic, medical, political and financial challenges of the next few months and 2021.

Based on reports I have seen (like this one and this one), it looks like most banks will not be cutting dividends and are well-capitalized and reserved to handle a serious recession. But you wouldn't think so if you look at how BTO's market price is down 42% from

Analyst’s Disclosure:I am/we are long BTO, JPS, FLC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.