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This 10.3% Dividend, At A 13.3% Discount, Is Perfect For A Fed-Driven Market

Published 04/07/2022, 05:09 AM
Updated 04/03/2018, 07:55 AM

These days, everyone is on guard for a recession. And the inverted yield curve only added to those fears.

Sure, a recession may be in the offing, but I don’t see one starting anytime soon. I don’t know about you, but I’ve never seen a recession hit when corporate profits are soaring like they are today—up 40% from pre-pandemic levels and forecast to keep rising:

Corporate Profits Up
Source: Wells Fargo Economics

This "profits-up, stocks-down" dynamic (the S&P 500 is still down about 4% from the start of the year as I write this) makes now a good time to buy, particularly if you’re doing so through my favorite high-yield investments: closed-end funds (CEFs), like the one we’ll discuss below.

CEF investors have two advantages over those who limit themselves to S&P 500 stocks:

  • The ability to buy at a "double discount" by taking advantage of the market’s 4%-off sale and adding the discounts to net asset value (NAV) that many CEFs are sporting right now.
  • Big dividends of 7% and up, which is the average yield across the CEF space as I write this.

Below we’re going to delve into a stock-focused CEF that yields 10.3%, trades at a 13.3% discount to NAV and holds upstart tech companies whose sales are growing fast—so fast they’ll squeeze out any worries about rising interest rates.

To see why now is a good time to make a move into stocks, especially through CEFs, take a look at the chart of forecast S&P 500 profits for the balance of the year below:

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Longer-Term Profits Abound

Earnings By Sector

Obviously, energy is overshadowing everything these days, due to high oil prices, but today we’re zeroing in on that information-technology number, which looks particularly attractive with the NASDAQ off 10% this year, despite having the third-fastest forecast profit growth. This is where our "double discounted" 10.3%-yielding CEF comes in.

A CEF "Discount Sale" On Fast-Growing Techs

A wild card in all of this has been the Federal Reserve’s rate hikes, which have spooked many investors because they think rate hikes will raise companies’ borrowing costs—driving down their profits in the process.

And while it’s true that rate hikes will make debt more costly for the most debt-laden firms, it’s also true that many companies out there have little to no debt, while others are growing so quickly that they’ll be able to shake off the effects of rising rates.

Those are the companies we’re looking for. We also want to find stocks with low price-to-sales ratios to be sure we’re getting a deal on that growth (which, in itself, gives us some downside protection).

One fund that holds such companies is the BlackRock Innovation and Growth Trust (NYSE:BIGZ).

As you can tell from the name, BIGZ is a tech-first fund focused on companies growing quickly in new markets or upending established ones. At the same time, they’re comparatively well-established. Examples of BIGZ holdings include Five9 (NASDAQ:FIVN), Entegris (NASDAQ:ENTG), 10x Genomics (NASDAQ:TXG), Bio-Techne Corp (NASDAQ:TECH), and Masimo Corp. (NASDAQ:MASI). In this environment, they’re great options.

BIGZ Top Picks Outlook
Source: CEF Insider

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Each of these companies shares two similarities: strong revenue growth (in red above) and reasonable valuations, based on their price-to-sales ratios (in blue). What’s more they all boast in-demand products, such as medical devices (Masimo), cloud computing (Five9), computer hardware (Entegris), or biotech innovations (10X Genomics) and Bio-Techne).

These fast-growing tech firms are the Teslas and Apples of tomorrow, priced low today, just as those firms were in their younger years. And thanks to BIGZ’s CEF structure, you get that whopping 10.3% dividend yield at 13.3% below the fund’s market price.

That discount is hardly deserved, especially when you consider that BIGZ is backed by BlackRock, the world’s largest investment firm, with its unbeatable resources and talent base. This deal only exists because BIGZ is young, having been launched just last year, and CEF investors are a risk-averse lot, so they haven’t given it the higher valuation it deserves–yet.

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."

Latest comments

One may stay away from high dividend paying stocks where price fluctuation is high.
Do you have your personal money in this stock? It has fallen off a cliff.
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