Over the last few months, I’ve seen dividend investors make the same mistake over and over: they constantly forget that the stock market always looks forward, not backward.
Making this easy blunder now could cost you a chance to grab cheap 7%+ dividends 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 tough to believe in this market bounce after the many cruel twists stocks have dealt us this year. And to be honest, it could take a long time for the market to fully find its footing. Heck, we may revisit the 2022 lows we hit back in the middle of July.
But my indicators all tell me that buying a well-run CEF that holds a mix of large- and mid-cap stocks will seem like a very smart move when you look back a year or so from now. (And as I mentioned last week, if you want to give yourself some extra peace of mind, you could use dollar-cost averaging to make your way in a bit at a time.)
I’ll name another fund (current yield: 7%) to keep on your watch list in a moment. First, let’s parse some of the latest economic tea leaves to see why now is a great time to make a few savvy CEF buys.
Resilient Consumers Could Get a (Rare) Hand From the Fed
When we buy stock-focused CEFs, we always aim to do so when the US consumer is holding up—and ideally spending more—because after all, consumer spending accounts for 70% of all US economic activity.
And the US consumer is certainly holding up, with wages rising 5.1% in the second quarter of 2022, the fastest rate in over 20 years.
That, in turn, is fueling sales for consumer-facing companies like Amazon (NASDAQ:AMZN), which beat analysts’ expectations with $121 billion in sales in the second quarter. Apple (NASDAQ:AAPL), too, beat forecasts, with over $82 billion in quarterly revenue.
Crucially, both companies pointed out that supply-chain issues are starting to abate, weakening one of the core causes of inflation.
Those are both great signs on their own, and we can throw in two more: one is the fact that stocks have a long way to go until they reclaim their January levels—leaving them plenty of room to run. The other is recently lowered expectations for interest rates (and by extension inflation, which has been outpacing those aforementioned wage gains).
According to the Fed funds futures market, the central bank’s rate hikes are now forecast to peak as soon as December.
Peak Rates: Just Three Hikes Away?
Of course, as CEF investors, we know that the best way to play any bounce in the market is through, well, CEFs! That’s because these funds give us exposure to the same stocks many of us own now, but with the big yields we crave.
A good example is the 7%-yielding Liberty All-Star Growth Fund (NYSE:ASG), a popular CEF—or as popular as a fund in this ridiculously overlooked asset class can be! ASG breaks out its portfolio over small-, medium- and large-cap stocks, with separate managers assigned to each category. That’s a smart setup that lets each manager focus more on their individual specialties.
The company holds consumer-facing names like Amazon (NASDAQ:AMZN), Visa (NYSE:V) and Microsoft (NASDAQ:MSFT),plus it adds some extra diversification by pulling stocks from other sectors, like insurer UnitedHealth (NYSE:UNH), whose technology-driven Optum unit provides pharmacy benefits, runs clinics and supplies data analytics and other cutting-edge tech to streamline healthcare.
ASG’s diversification, along with its specialized management structure, helped it deliver a 288% total return over the last decade (with much of that gain in dividend cash), even when you include the mess that has been 2022.
It’s a great fund, to be sure, but you might recall that a second ago, I said it was ideal for your watch list (not your buy list!). That’s because it trades at a 9% premium to net asset value (NAV, or the value of the stocks in its portfolio) right now, and we always demand a discount.
So my recommendation is to hold off on this one for now—but watch its discount like a hawk.
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."