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This 6.2% AI Dividend Pays Us Every Month

Published 07/11/2023, 05:05 AM
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Few people would put the words “artificial intelligence” and “big dividends” in the same sentence—but those folks have never heard of closed-end funds (CEFs)!

These “yield machines” are perfect plays on the surging AI megatrend for three reasons:

  • Big dividends: Thanks to CEFs, we can “download” big cash payouts from stocks that pay low (or no!) dividends themselves. Getting our payouts in cash, rather than paper gains, is priceless in the sometimes-volatile world of AI investing.
  • Lower volatility: Speaking of volatility, as most equity CEFs invest in various sectors—not just tech—we get some extra insurance over folks who try to “cherry-pick” the AI trend themselves. The CEF we’ll talk about below, for example, carries a 5-year beta rating (a measure of volatility) of 1.2, only modestly more than the S&P 500 and on par with the NASDAQ.
  • “Clock rewinding” discounts: CEF veterans know about a CEF’s discount to net asset value (NAV), which lets us buy the stocks in a fund’s portfolio for less than they’re really worth. This is a “secret weapon” with megatrends like AI, because it lets us buy for prices not seen in months.

Let’s dive into the ticker I have for you today—it’s a “stealth” AI play that’s no flash in the pan: it was launched 20 years ago, when AI was the stuff of science fiction.

A 20-Year-Old Fund That Taps AI for 6.2% Dividends—for 16% Off

That would be the Gabelli Dividend & Income Closed Fund (NYSE:GDV), which was launched in 2003 and yields 6.2% today (with a payout that rolls your way monthly). GDV also trades at a 16% discount to NAV that’s actually gotten wider in the last few months.

GDV Goes on Sale
GDV-Discount-NAV

In other words, we can pick up GDV for just 84 cents on the dollar! The chart above shows just how abnormal that is.

GDV-Top-Holdings

Source: Gabelli Dividend & Income Trust

So why do I see GDV as an AI play? Let’s walk through its holdings, above, and see. First, and most obviously, the fund holds the two blue chips that exemplify AI No. 3 holding Microsoft (NASDAQ:MSFT) and No. 4 holding Alphabet (NASDAQ:GOOGL).

But here’s what most folks don’t realize: GDV’s other holdings are a who’s who of companies that will profit from the productivity gains AI brings, like Mastercard (NYSE:MA), American Express (NYSE:AXP), JPMorgan Chase & Co. (NYSE:JPM) and industrial giant Honeywell International (NASDAQ:HON).

That’s another nice thing about investing through CEFs: you can buy without having to change investments, because a CEF like GDV holds many of the same stocks you likely already own—but with a 6.2% payout.

How a Closing CEF “Discount Window” Can Drive Fast Gains

Now let’s talk a bit more about that discount to NAV, because at 16%, it’s right around where we bought GDV in my Contrarian Income Report service back in October 2020.

Over the next 15 months, we pocketed GDV’s generous payout and enjoyed a 34% price increase as its discount narrowed from 16% to 10%, effectively catapulting the price higher. Add in the dividend (as shown in the orange line below), and our “discount-driven” total return came in at 44%—or a gaudy 31.1% on an annualized basis.

GDV’s Dividend Boosts Our Return
GDV-Total-Returns

That narrow discount, plus the fact that Jay Powell was right at the start of his tightening spree near the end of our holding period, gave us a nice spot to step out, so we did, taking our 44% return with us.

A 6.2% Payout That Grows

Now the wind has swung back behind GDV, with rates topping out and the fund giving us a nice “in” on the AI trend, thanks to its 16% discount, safe blue-chip exposure to AI and its 6.2% monthly payout, which has grown 22% in the last decade. (Plus Gabelli drops the odd special dividend on his investors, too.)

A “Like-Clockwork” Monthly Dividend (With Bonus Payouts, Too)
GDV-Dividend-History

All of the above points to a narrower discount for GDV than the 10% it hit last time we held it—and potential for strong price upside as that happens.

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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