Over the past few months, I’ve seen dividend investors make the same mistake over and over again: They constantly forget that the stock market always looks the same. Next, not backward.
Making this easy mistake now can give you a chance to grab cheap 7%+ dividends on closed-end funds (CEFs)—and potentially set you up for years of steady cash payments and price gains.
Shaking off “investor shell shock”.
I know this market bounce is hard to believe after the many brutal turns stocks have dealt us this year. And to be honest, it can take a long time for the market to fully find its footing. Heck, we could revisit the 2022 low back in mid-July.
But all my indicators say that buying a well-run CEF with a mix of large- and mid-cap stocks seems the way to go. too much A smart move when you look back a year or so from now. (And as I mentioned last week, if you want to give yourself a little extra peace of mind, you can use dollar-cost averaging to work your way up a little at a time.)
our CEF Insider The portfolio is a good place to look for fresh buys: It has U.S. and international blue-chip stocks, as well as tech names, spread across the 25 CEFs it owns, giving it an average yield of 8.9% today.
In a moment I will name another fund (current yield: 7%) to keep on your watch list. First, let’s parse some recent financial tea leaves to see why now is a good time to make some informed CEF purchases.
Resilient consumers can get a (rare) hand from the Fed
When we buy stock-focused CEFs, we always aim to do so when US consumers are holding and ideally spending more because, after all, consumer spending accounts for 70% of all US economic activity.
And US consumers are certainly holding on, with wages rising 5.1% in the second quarter of 2022, the fastest rate in 20 years.
That, in turn, boosts sales for consumer-facing companies Amazon
Crucially, both companies are beginning to abate supply-chain problems, undermining one of the main causes of inflation.
Those are both big signs on their own, and we can throw in two more: One is that stocks have a long way to go until they regain their January levels—giving them plenty of room to run. Others have recently lowered expectations for interest rates (and by extension inflation, which will outpace the aforementioned wage gains).
According to the Fed Fund Futures market, the central bank’s rate hikes are forecast to peak as soon as December.
Peak rates: just three hikes away?
Of course, as CEF investors, we know that the best way to play any bounce in the market is through CEFs! That’s because these funds have exposure to the same stocks that many of us own now, but with bigger yields that we crave.
A good example is the 7%-yield Liberty All-Star Growth Fund (ASG), the popular CEF—or just as popular as a fund in this ridiculously overlooked asset class! ASG divides its portfolio into small-, mid- and large-cap stocks, with separate managers assigned to each category. That’s a smart setup that allows each manager to focus more on their individual specialties.
The company has consumer-facing names Amazon (AMZN), Visa
ASG’s diversification, along with its specialized management structure, has helped it deliver a 288% total return over the past decade (with much of the gain in dividend cash), even when you add in the 2022 mess.
It’s a huge treasure, to be sure, but you might remember a second ago, I said it’s perfect for you to watch list (not your shopping list!). Because it trades at 9% Premium Now to net asset value (NAV, or the value of the shares in its portfolio) and we always want a discount.
So my recommendation is to hold off on it for now—but watch its discount like a hawk. In the meantime, check out my buy-rated bargain-priced equity CEFs CEF Insider Excellent portfolio Discounted To buy high yield CEFs.
Michael Foster is Principal Research Analyst Opposite point of view. For more income ideas, click here for our latest report “Fixed Income: 5 bargain funds with safe 8.4% dividends.“