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My 'Secret' Post-COVID Buy For 5.6% Dividends And Big Gain

By Contrarian Outlook (Michael Foster)Stock MarketsMar 25, 2021 05:06AM ET
My 'Secret' Post-COVID Buy For 5.6% Dividends And Big Gain
By Contrarian Outlook (Michael Foster)   |  Mar 25, 2021 05:06AM ET
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Don’t listen to the pundits who say you’ve missed your chance to buy the dip in tech stocks. There are still deals on the table—and I’ve got a way for you to grab a slice of the gains to come while pocketing a 5.6% dividend that’s growing.

That way leads straight through a high-yield closed-end fund (CEF) we’ll dive into in a second.

CEFs have long been my go-to for tech investing, mainly because, even in a rising market like this one, you can still get dividends of 5%+ from tech CEFs—payouts you’d be very hard-pressed to get by buying tech stocks “direct.”

After all, big tech names like Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) yield just 0.7% and 1%, respectively—and we’re sure not retiring off of those payouts!

Tech’s Strong Growth Will Continue Post-COVID

Truth is, today’s setup, with tech stocks as a whole still lagging the broader market, reminds me a bit of where tech was a year ago—as lockdowns kicked in, investors sold off the sector, totally missing the boat on what a critical lifeline tech firms would be, for everything from connecting with loved ones to shopping, in the following months.

Fast-forward to today and the strong clip of vaccinations in the US means more Americans will be getting out of lockdowns and quarantines, many with fresh stimulus checks in their pockets. They’ll still be dropping that cash online, and the spending spree will also fuel advertising-focused companies like Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB), as shoppers use their services to hunt for the goods they’re after.

Plus, the spending spree is going to put more demand on retail infrastructure, which benefits companies like Microsoft, Visa (NYSE:V) and PayPal (NASDAQ:PYPL). So there’s still a lot of reason to be bullish on tech, despite the negative coverage we’re getting from the financial press these days.

One CEF with a lot of appeal in a market like this is the Eaton Vance Enhanced Equity Income Fund II (NYSE:EOS). It’s a 5.6%-payer that restarted dividend growth pre-pandemic, and I see more hikes on the way.

EOS’s Dividend Growth Reawakens
EOS-Dividend Growth
EOS-Dividend Growth

In fact, thanks in part to the last payout hike, investors who bought five years ago are now getting a 9.1% yield on their original buy.

The future growth I expect in the fund’s dividend stems from its big portfolio gains, which I expect management to hand out in the form of a fatter payout. This also means that EOS dispels the old “wisdom” that you can have a high current yield or dividend growth in an investment, but not both.

EOS Goes On A Tear

Look for higher payouts next.

EOS-Total Returns
EOS-Total Returns

That performance includes a big move past the broader index in the last five years, too.

EOS Beats The Index
EOS-Tops SPY Chart
EOS-Tops SPY Chart

This growth has been possible because EOS’s portfolio has exactly the kind of cash-producing, high-value growth companies the world has become dependent on. All the tech firms I mentioned above are core holdings in EOS, and the rest of the portfolio is also well positioned for the future US retail renaissance.

EOS-Holdings Table
EOS-Holdings Table

What I’ve seen in EOS is not unique to this fund. Across the world of equity-focused CEFs, there has been a shift away from the investment strategies of the ’90s and 2000s and toward a new combination of growth-focused investing and a keen focus on value. It’s a combination that’s been proving that the index can be beaten by funds run by savvy managers—and they’re doing it more and more.

CEFs are benefiting from this shift, especially in the fast-growing tech sector, and CEF investors are profiting as a result.

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."

My 'Secret' Post-COVID Buy For 5.6% Dividends And Big Gain

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My 'Secret' Post-COVID Buy For 5.6% Dividends And Big Gain

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