Healthcare Recovery's financing strategy: Income-based method

The healthcare sector, long under scrutiny, presents an intriguing opportunity for investors seeking solid long-term returns. One fund that stands out in this context is the abrdn Healthcare Investors (HQH), a Closed-End Fund (CEF) with a focus on the healthcare sector.

Despite the sector's poor performance in recent years, sector funds like HQH offer a promising approach to the healthcare sector's recovery. With a deep Net Asset Value (NAV) discount providing a reasonable entry level, HQH is a solid choice for investors.

The S&P 500 PE is currently very close to 30, making underperforming sectors like healthcare more attractive for value-seeking investors. In this regard, the Health Care Select Sector SPDR Fund (XLV) boasts a lower P/E ratio, offering potential value to investors.

However, the healthcare sector faces challenges in the short run. Vaccine skepticism, US leadership changes in the FDA, the Make America Healthy movement, and cost reduction of healthcare are factors that could negatively impact the market. Additionally, the profit margin squeeze could potentially affect the dividend yield for HQH, putting some dividends at risk.

Despite these challenges, HQH offers a solid foundation for a good total return. The fund's top ten holdings include Gilead, Amgen, UnitedHealth, and Abbott Laboratories, providing a diverse portfolio. HQH also has a leverage of 1.1% and an expense ratio of 1.12%.

The fund's recent performance has been noteworthy. UnitedHealth Group's (UNH) stock, one of HQH's top holdings, increased by 12% on August 15, following Warren Buffett's Berkshire Hathaway's purchase of 5 million shares of UNH. This purchase is considered a strong signal for a potential bottom in the struggling healthcare sector.

Furthermore, the top ownership distribution of HQH has shown an increase since May, with no negative changes in the top 20 list and most adding shares in July. This could be a sign that money may start to flow into the healthcare space.

Investors should, however, exercise caution and vigilance, as the market disconnect in the healthcare sector may persist for a longer time. For conservative investors, HQH CEF with over 12% yield offers an interesting alternative for those who might expect the worst is behind the healthcare sector. The fund currently pays a distribution of 12.40% and features a Net Asset Value (NAV) discount of -9.36%. With a BUY rating, HQH could be a promising investment for the long-term.