This Double-Discounted 11.8% Dividend Has a Big Edge in 2023
Contrarian Outlook | Jan 12, 2023 04:14AM ET
There are three big overlooked trends in the stock market now, and by tapping each one, we can set ourselves up for some very nice long-term gains in my favorite high-yield vehicles: closed-end funds (CEFs).
The 11.8%-yielding CEF we’ll discuss further on, the BlackRock (NYSE:BLK) Innovation & Growth Trust (BIGZ), is a prime example of a CEF with loads of upside potential now. I’ve also got a collection of buys yielding up to 9.6% on average (with many paying dividends monthly).
h2 Inside 2023’s “Double Discount” on CEFs/h2CEFs’ high dividends are one reason why we favor these funds. Another is that right now, CEFs are offering up a rare “double discount”: one deal on CEFs’ portfolios (many of which are bargains due to last year’s selloff) and another on the fund itself, thanks to its discount to net asset value (NAV, or the value of the stocks in its portfolio).
These discounts to NAV are unique to CEFs and a main source of profits in these funds. They stem from the fact that CEFs’ share counts are mostly fixed from the time they’re issued. That means CEFs can trade at values different from the per-share values of their portfolios.
Our strategy? Buy when discounts are unusually wide, then ride along as the discount narrows, boosting CEFs’ share prices as they do.
And right now, we have some tremendous discounts in CEFs (and on BIGZ in particular) thanks to three overlooked shifts happening in the market right now.
h2 Overlooked 2023 Trend No. 1: Inflation Is Ebbing/h2Inflation was the buzzword of 2022 as COVID-19 snarled supply chains, whacked productivity, and permanently altered consumer spending.
But things are settling down on the spending and supply-chain fronts, causing the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) price index, to decline, too:
h2 PCE Falls, Giving the Fed Breathing RoomThe Federal Reserve favors PCE instead of the commonly followed consumer price index (CPI) as an inflation measure. PCE’s lower current level means that we went from a spike to the highest inflation in 40 years to a level a bit above what we saw in 2005 and 2008.
h2 Overlooked 2023 Trend No. 2: The Fed Is Moving to the Sidelines/h2
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The PCE decline is why the Fed funds futures market hasn’t priced in many rate hikes this year: 50 basis points in total, which is a big change from 2022.
Rate Hikes Shift to Low Gear
With rate hikes being about a tenth of what they were last year, it’s clear that the Fed won’t be the major market influencer it was last year, even though markets have priced in another year of rate-based stress.
h2 Overlooked 2023 Trend No. 3: Recession Fears Are Ringing Hollow/h2There is one wild card that could stop the momentum in the market today: a recession.
While the data looks like things are improving for the US economy, most on Wall Street and in the press believe a recession is imminent. This, again, is why stocks and CEFs are oversold, at least until (and if!) that recession happens. That’s a big if, considering that, here again, the data differs from market perceptions.
Economy Shrugs Off Recession Fears
Using cutting-edge methods, the Atlanta Federal Reserve provides a real-time estimate of GDP growth that has a better track record than Wall Street economists. And the Atlanta Fed sees nearly 4% growth in the fourth quarter of this year.
This has been a pattern for months now. For example, the Atlanta Fed’s measure saw 2.9% growth in the third quarter versus a 1.2% expectation from Wall Street economists. The real number was 3.2%.
h2 An 11.8% Double Discounted Dividend Built for 2023/h2When macro data is this bullish, investors easily make mistakes by picking the wrong stocks or going with an ETF that is tied to an underlying index—and is therefore unable to steer around stocks with their own unique problems.
This is a major reason why CEFs are a better way to invest than ETFs. Not only do we get higher dividends than ETFs pay and our CEF double discount,—we also get the expertise of a professional manager. And we often get those management services for free, to boot!
To see what I mean, let’s swing back to the BlackRock Innovation & Growth Trust (BIGZ). As mentioned, this fund yields 11.8%. It also trades at an outsized 20.8% discount to NAV. Since that discount is much larger than BIGZ’s 1.25% management fee, we’re essentially being “comped” for the expert team from BlackRock, the world’s largest investment firm.
BIGZ holds growth-oriented names like Axon Enterprise (NASDAQ:AXON), a maker of security technology; Entegris (NASDAQ:ENTG), a producer of systems that purify materials in the semiconductor space; telecom-equipment supplier Five9 (NASDAQ:FIVN); and Bio-Techne Corp (NASDAQ:TECH), which supplies products for pharmaceutical testing.
These are all top-quality techs that were hit hard in 2022 but have strong bounce-back potential in 2023, as the sector that gets hit hardest in a selloff is usually the one to lead the recovery—think financial stocks in the wake of the 2008/2009 meltdown. That, plus the high dividend and deep discount, makes BIGZ more than worth your attention now.
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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