My “Rinse And Repeat” Plan For 8.3% Dividends, 117% Annualized Gains
Contrarian Outlook | Nov 02, 2021 05:41AM ET
Crypto? We contrarian income investors don’t need it. Gambling in Bitcoin, Ether or any “coins” with a dog on the front is pointless when we can dial in a safe dividend strategy for annualized returns up to 117%.
This sneaky-smart plan is secure. It’s repeatable. And oh, by the way, it is flashing a B-U-Y signal today.
When we last used this “rinse and repeat” strategy a year ago, we bagged price gains up to 38% in as little as four months, plus dividends as high as 8.3%! Thanks to our short holding period, these gains translate into 117% profits on a yearly basis.
That’s the past, and this is now. Which is why we’re talking—because we have the opportunity to bank quick 20%+ dividend-powered returns in the coming year, and every year thereafter, regardless of what happens in the broader markets.
h2 How We Bagged 7%+ Payouts And 23%+ Gains (In As Little As 4 Months)/h2Nov. 1 kicked off “stock season.” These six months are the secret to our double-digit returns, particularly as the stock market tends to faceplant most years in September and October.
The reasons behind this fall pullback aren’t complicated: the weather turns, investors’ moods turn sour, and stocks sink. That’s it. But the overall effect is that this dip “refreshes” the market as it enters the period when it’s delivered most of its gains, from Nov. 1 to May 1.
With the calendar having just flipped to November, we’re perfectly positioned to get in just as that period of strength arrives. In fact, our shot is better than it’s been in years, as we’ll discuss below.
It’s shocking how few investors put this seemingly obvious pattern to work, like we did to great effect in my Dividend Swing Trader service last fall.
Coming out of the summer of 2020, half of our portfolio was parked in cash, waiting for the fall selloff to bottom. And right on cue, we got our opportunity, with the market dropping 7% in September and October:
h2 “Pre-Season” Buying Opportunity Opened Up In Fall 2020/h2
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So we pounced, but we didn’t just ride the seasonal wave with blue chip stocks or index funds—we targeted the bulk of our cash at closed-end funds (CEFs).
This is where you get into serious gains because instead of paying us only one way, through price appreciation, as most stocks and ETFs do, CEFs bought during the regular autumn lull have four ways to put cash in our pockets!
- Huge dividends: The average CEF yields 6.9% today. That bulks up your income stream and prompts other income-starved investors to bid up the fund’s price.
- Big discounts: Many CEFs trade at discounts to net asset value (NAV, or the value of the investments they hold). This metric is easy to spot on any fund screener, making our strategy simple: buy when a fund’s discount is wide, then ride it higher, grabbing “snap-back” upside price upside as we do!
- Rising NAV, as the CEF’s portfolio appreciates, again yanking the stock price along with it.
- Our seasonality indicator, which throws a nice lift under our funds’ NAV—and share price!
This “four-way profit play” paid off in spades for us last year: we banked fast profits of 38%, 27%, 23%, 14% and 13% on our five buys, with all but one being CEFs.
h2 October 2020 DST Buys Averaged 23% Returns/h2That’s a 23% average gain on just five trades, four of which lasted five months or less. This year, the pattern is setting up again: September was sloppy, and October opened ominously before the market righted itself late in the month, giving our holdings a nice lift.
But this was just the opening act. With the biggest market gains still set to arrive from Nov. 1 to May 1, we’re nicely positioned for even bigger wins.
In fact, this is where things get really good, because we’ll enjoy the side effects from Fed Chair Jay Powell’s money printer, which has sent the M2 money supply bouncing by 34% since the start of 2020:
h2 More Cash Flowing Into Dividend Swing Trader Positions/h2In other words, there’s still a lot of cash out there chasing stocks, plus our strong seasonal pattern is just setting up. That’s a perfect environment for us to “swing trade” ourselves another round of quick 23%+ total returns!
But we won’t simply roll back into last year’s plays. The BlackRock Enhanced Equity Dividend Trust (NYSE:BDJ), for example, has seen its discount practically disappear in the broader market rally: it stands at 3.1%, today, a shadow of the massive 13% markdown we enjoyed when we bought in October 2020.
So no “snap back” upside awaits us here.
Convertible bonds, too, are overpriced: the Calamos Dynamic Convertible and Income Fund (NASDAQ:CCD), which we scooped up at a 9% discount in October 2020, now trades at a 3.84% premium to NAV—in other words, investors are paying $1.04 for every dollar of CCD’s assets!
Instead, our picks this year include a CEF that focuses on small cap stocks. We want to grab small caps now because the small cap Russell 2000 index has been consolidating since Mar. 15.
h2 Small Caps Put Pressure On Upper Limit/h2Our small cap focused CEF yields 7.1% and is run by a value investing legend. It lets us collect that 7.1% payout while we wait for small caps to break their upper resistance band. When that happens (inevitably, in my view), the fund’s 10% discount will contract, giving us an extra upside boost.
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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