This Market “Time Machine” Gives You 7.6% Dividends, 39% Gains
Contrarian Outlook | Jun 11, 2020 05:07AM ET
What if I told you I’d found a way for you to buy Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Home Depot (NYSE:HD), McDonald’s (NYSE:MCD) and other big-name stocks for 14% off their current prices?
It would be like rewinding the clock on this rebound, wouldn’t it? With stocks now having mostly erased their year-to-date losses, buying at a 14% discount would, in essence, be like buying these very same stocks back in late April:
h3 Your Stock-Market “Time Machine”/h3The way to do this is by purchasing a closed-end fund (CEF) that holds these stocks. Not only do CEFs regularly trade at big discounts to their “true” value, but they also pay dividends far higher than individual stocks do—I’m talking rich payouts of 7% and up.
We’ll talk more about these crucial aspects of CEF investing, and look at how they powered one fund to a 39% total return, shortly. Before we get to that, though, you’re probably wondering if now is a good time to buy stocks at all—even if we can get in at a discount.
Here’s how I see the current state of play: as of Tuesday evening, stocks were essentially at breakeven on the year and only marginally below their all-time highs. The question is: what’s causing this strength? Is it the Fed? The gradual reopening of the economy? Hopes for remdesivir and/or a vaccine to end the COVID-19 crisis?
In reality, the answer is probably all of the above, with historically unprecedented monetary stimulus from central banks around the world giving investors confidence while data on the virus’s spread suggests we may have gotten through the worst of it. And since the stock market is forward-looking, that suggests stocks could be past the worst of it, too.
This is, of course, great news if you bought the dip, as I urged investors to do in early April . But if you missed the bounce, you’re likely feeling disappointed. And that’s where CEFs come in.
h3 The CEF Discount Play/h3There are hundreds of CEFs that invest in equities. And thanks to the CEF structure, these funds can trade at a market price different from the actual value of their portfolios (called the net asset value, or NAV). Buy a CEF at a discount and you’ll get a bunch of stocks while paying less than their actual market price.
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And then there’s the income: the average CEF pays 7.3% today, far higher than the 1.8% you’d get from the SPDR S&P 500 ETF (NYSE:SPY) and also well ahead of what you’d get from a dividend-focused fund like the SPDR S&P Dividend ETF (NYSE:SDY), which pays 2.8%.
We can more than double that with CEFs immediately—especially a fund like the AllianzGI Dividend Interest & Premium Strategy Fund (NYSE:NFJ), a name CEF Insider members will likely recognize, as it’s a recent holding of the service. This fund yields 7.6% today, and you can pick up its diversified stock portfolio at a 13.7% discount to NAV—one of the highest discounts it’s had in the last decade.
Plus, with NFJ, you’re not getting exposure to any unseen risks. The fund doesn’t use leverage, and it holds a portfolio of mostly large-cap, familiar names—companies that have been leading the recovery.
Imagine getting exposure to some of the biggest names in the S&P 500 for 14% less than if you actually bought the shares on the open market! This is the power of CEFs, and it’s how you can get into this rebounding market without paying full price.
h3 CEF Discounts in Action/h3NFJ’s discount has been a reliable predictor of upside. An investor who bought when the discount was over 15% in December 2018 would have gotten a 39.2% return in just a year:
h3 Buying at a Discount Pays Off Big/h3Compare that to the one-year return for someone who bought NFJ in September 2018, when it was trading at a 3% premium to NAV:
h3 … While Overpaying Has a Predictable Result/h3Buying a CEF when it’s cheap and selling when it’s expensive is a prime strategy for optimizing your income and your total return—and by building a portfolio of CEFs, you can rotate in and out of funds as they get too cheap or too expensive, while collecting a 7% (or higher) income stream throughout.
h3 5 NEW Picks for 8.7% Dividends, 20%+ Upside (discounts vanishing fast!)/h3Let’s be honest: these days, we’re all yearning for just one thing: to get our investment portfolios feeling a lot more predictable. Today I’m going to offer you a collection of CEFs that can help you do just that.
These 5 new picks yield much more than NFJ pays today—an outsized 8.7% average dividend, with one of these steady income plays delivering a truly unheard-of 11% payout!
The discounts?
They’re massive, too—so much so that I’m calling for 20%+ price upside in the next year, even if the market rises only modestly from here. And if stocks do tumble, these funds’ bargain valuations help keep them steady while we collect that rock-solid 8.7% payout!
So you’re getting big dividends (possibly big enough for you to live on your payouts alone) and downside protection to help get your nest egg through the rest of this crisis intact.
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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