36% Returns In 7 Months From Safe Dividends: Here’s How
Contrarian Outlook | Apr 14, 2021 05:11AM ET
Start rounding up your spare cash, because the best dividend buying opportunity—since last October—is coming soon.
Last week, we chatted about stacking dry powder for a special purchasing moment. For those of you who have been piling up the payouts into a cash mountain, let’s get ready to deploy it.
Why does this matter? Well, buying moments like these can secure us several years’ worth of returns at once. Let’s revisit the October example, which Contrarian Income Report subscribers will remember fondly.
At the time, we had two months of pullback behind us. Scary headlines had driven fear to levels that should be bought, and that is exactly what we contrarians did.
In our October issue of CIR, we “backed up the truck” and bought not one but two high-yielding closed end funds (CEFs). Those two, the Gabelli Dividend & Income Closed Fund (NYSE:GDV) and Eaton Vance Tax-Managed Global Diversified Equity Fund (NYSE:EXG), then soared 36% and 33% respectively. That’s several years’ worth of profits and dividends in fewer than seven months.
h2 Congrats to CIR Subscribers on These WinnersAcross the income highway, my Dividend Swing Trader service took a similar approach. Except we didn’t just back up a truck—we used an entire flatbed!
And oh, how our dividend haul did grow! The financial markets flipped from a fearful October to a joyous January, which we took as our cue to book these gains:
It was a good time to step aside. While the BlackRock (NYSE:BLK) health and technology funds listed above are high-quality, they aren’t going to appreciate by 20% to 30%+ every few months. Simple math dictated that a pause was in order.
Well, did we stay in the funds and grit out teeth during a pullback? If we’re investing for the long run, then sure, we can look away for a while. But as dividend swing traders, we were better off booking our gains and sitting safely in cash.
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So, that’s exactly what we did—and sidestepped these 12% corrections:
h2 We’re Glad We Sold These Two Before ThisOf course, we’re not going to sit in cash forever. Fortunately, in these types of rollercoaster markets, the next buying opportunity is only weeks or months away. And, thanks to two months of jittery market nerves, it is time to go dividend shopping once again.
What is it that we contrarians like about this market so much? I mean, equity valuations are rich, normally safe Treasury bonds are crushing their holders and the economy-at-large is slowly staggering back to its feet.
BUT! There are checks being printed and mailed to American citizens at a scale that we’ve never seen before in our country’s history. There is a lot of newly created money that will soon be looking for a home. Plenty of it is going to end up in the stock market.
Now, I’m not saying we should pile into speculative tech names. Buying high hoping to sell even higher is what most investors are doing. We can make more money with less risk simply by purchasing the secure dividend payers you and I know and love.
Tech shares have already been bid up to the moon. Next, the money is going to flow to better bargains. And believe it or not, there are some amazing values out there right now.
As I write, I’m staring at a closed-end fund (CEF) that yields 8.3% and trades at an 18% discount to its net asset value (NAV). An 18% discount! In other words, this fund is trading for just 82 cents on the dollar.
With a sub-billion market cap, the income fund eludes the big fish on Wall Street. Heck, we can’t recommend it in CIR for the same reason. We’d move the price too quickly and the discount would evaporate.
This is the type of dividend trade, however, that is perfect for Dividend Swing Trader.
In fact, our DST portfolio contains the same types of stocks and funds that we all know and love from CIR. We buy them and sell them just as we would any dividend-paying ticker. And, to maximize our gains, we trade these shares with a few subtle twists with respect to our longer-term CIR strategy.
First, our target holding period in DST is months rather than years. We ride waves up in the market (like the one from October through January) and sidestep the rocky shoreline (February and March). The result is outsized gains during rallies and less downside risk during declines thanks to a large cash position.
Second, we’re not using options. No puts, no covered calls. Don’t need ‘em, don’t want ‘em. We can achieve these excellent multi-month returns simply by buying and selling regular income stocks and funds.
Third, to that point, we’re acting a bit faster. We touch base every two weeks, rather than once a month. And from time-to-time, when I see an amazing buying opportunity (as I did in October), I’ll send out a Flash Alert so that subscribers can secure the best possible price.
Which is why I’m writing to you today—we’re getting quite close to this type of “back up the dividend truck” signal again. I know it sounds crazy with the market closing at all-time highs every week, but all signs are pointing to this being an asset price boom driven by money printing.
And what better way to enjoy the Fed-fueled party than by sitting in dividend payers that are set to soar for the rest of the year?
Disclosure: 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 ."
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