How to leverage this rebound for 7% dividends


Over the past few months, I’ve seen dividend investors make the same mistake over and over: they constantly forget that the stock market is always there forward, not backwards.

Making this easy blunder now could cost you the chance to get cheap dividends of more than 7% in closed-end funds (CEFs) – and potentially set yourself up for years of steady cash payouts and price gains.

Shaking off “Investor Shell Shock”

I know it’s hard to believe in this market upswing after the many brutal twists that stocks have brought us this year. And to be fair, it may take a long time for the market to fully gain a foothold. Heck, we can revisit the 2022 lows we hit in mid-July.

But my indicators all tell me that buying a well-managed CEF with a mix of large and mid-cap stocks is a terribly smart move if you look back in a year or so. (And as I mentioned last week, if you want to give yourself some extra peace of mind, you can use dollar cost averaging to find your way bit by bit.)

U.S CEF Insider portfolio is a great place to look for new purchases: it has US and international blue chip stocks, along with technology names, spread across the 25 CEFs it owns, which today average an outsized 8.9%.

I’ll mention another fund in a moment (current yield: 7%) to keep on your watchlist. First, let’s take a look at the most recent economic tea leaves to see why now is a great time to make some smart CEF buys.

Resilient consumers can get a (rare) hand from the Fed

When we buy equity-focused CEFs, we always aim to do so when the US consumer persists – and ideally spends more – because after all, consumer spending accounts for 70% of all US economic activity.

And the U.S. consumer is certainly holding up, with wages rising 5.1% in the second quarter of 2022, the highest rate in more than 20 years.

That in turn stimulates the sale of consumer-oriented companies such as Amazon

which exceeded analyst expectations with second-quarter revenue of $121 billion. Apple

also beat forecasts, with more than $82 billion in quarterly revenue.

Crucially, both companies pointed out that supply chain problems are beginning to abate, weakening one of the main drivers of inflation.

Those are both great signs in their own right, and we can add two more: One is the fact that stocks still have a long way to go before they regain their January levels, giving them plenty of room to run. The other is the recently lowered expectations for interest rates (and by extension inflation, which is outpacing the wage increases mentioned above).

According to the Fed Funds futures market, central bank rate hikes are now expected to peak as early as December.

Peak Rates: Just Three Walks Away?

As CEF investors, of course, we know that the best way to play a bounce in the market is through, well, CEFs! That’s because these funds give us exposure to the same stocks that many of us now own, but with the big returns we crave.

A good example is the 7% yield Liberty All-Star Growth Fund (ASG), a popular CEF – or as popular as a fund in this ridiculously overlooked asset class can be! ASG divides its portfolio into small, medium and large cap stocks, with separate managers assigned to each category. This is a smart set-up that allows each manager to focus more on his or her individual specialties.

The company has names aimed at consumers such as: Amazon (AMZN), Visa

and Microsoft

plus it adds some extra diversification by pulling stocks from other sectors such as insurers UnitedHealth Group

whose technology-driven Optum unit provides pharmacy benefits, runs clinics, and provides data analytics and other cutting-edge technology to streamline healthcare.

ASG’s diversification, along with its specialized management structure, helped ASG achieve a total return of 288% over the past decade (with much of that gain in dividend money), even if you factor in the 2022 mess.

It’s a great fund for sure, but you may remember that a second ago I said it was ideal for you watch list (not your buy list!). That’s because it trades at 9% premium to the net asset value (NAV, or the value of the stocks in his portfolio) at the moment, and we always ask for a discount.

So my recommendation is to put this one off for now, but watch the discount like a hawk. In the meantime, check out the bargain-priced stock CEFs in my CEF Insider portfolio for the best discounted buy high-yield CEFs.

Michael Foster is the principal research analyst for: Contrary Outlook. For more great income ideas, click here for our latest report »Indestructible Income: 5 bargain funds with safe 8.4% dividends.

Disclosure: none



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