close
close

Over the past few months, I’ve seen dividend investors make the same mistake over and over again: They keep forgetting that the stock market is always watching Forward, Not backward.

If you make this simple mistake now, you could lose your chance at cheap dividends of over 7% in closed-end funds (CEFs) — and potentially set yourself up for years of consistent cash payouts and stock price gains.

Shake off “investor shell shock”.

I know it’s hard to believe in this market rebound after stocks have taken us so many horrible turns this year. And to be honest, it could take a long time for the market to fully take root. Heck, we might revisit the 2022 lows we hit in mid-July.

But my indicators are all telling me that buying a well-managed CEF, which includes a mix of large and mid-cap stocks, will appear like a buy very smart move when you look back in a year or so. (And as I mentioned last week, if you want to get some peace of mind, you can use the dollar cost average to gradually find your way around.)

Our CEF Insider The portfolio is a great place to look for new buys: it includes US and international blue-chip stocks, as well as technology stocks, spread across the 25 CEFs it holds, which averages above the 8.9 today discard %

I’ll tell you another fund (current yield: 7%) that you should keep on your watch list. First, let’s analyze some of the latest economic tea leaves to see why now is a good time to make some smart CEF buys.

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

When we buy equity-focused CEFs, we aim to do so whenever the US consumer is holding out – and ideally spending more – given that 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, fuels sales for consumer-centric companies like Amazon

AMZN
(AMZN),
which beat analysts’ expectations with second-quarter revenue of $121 billion. Apple

AAPL
(AAPL),
also beat guidance with quarterly sales of over $82 billion.

Crucially, both companies pointed out that supply chain problems are beginning to ease, weakening a key cause of inflation.

Those are both great signs in their own right, and we can add two more: First, 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 hence for inflation, which has outpaced the wage increases mentioned above).

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

Maximum Prices: Only three hikes away?

Of course, as CEF investors, we know that the best way to capitalize on a market rally is through CEFs! That’s because these funds give us access to the same stocks many of us own now, but with the high returns we crave.

A good example is the 7% return Liberty All-Star Growth Fund (ASG), a popular CEF – or as popular as a fund can be in this ridiculously overlooked asset class! ASG divides its portfolio into small, medium, and large-cap stocks, with separate managers assigned to each category. This is an intelligent setup that allows each manager to focus more on their individual areas of expertise.

The company keeps consumer-focused names like Amazon (AMZN), Visa

v
(V)
and Microsoft

MSFT
(MSFT),
Also, it adds additional diversification by pulling stocks from other sectors, such as insurance companies United Health Group

UNH
(UNH),
whose technology-driven Optum unit provides pharmacy benefits, operates clinics, and delivers data analytics and other cutting-edge technologies to streamline healthcare.

ASG’s diversification, coupled with its specialized management structure, has helped it deliver a 288% total return over the past decade (with much of that gain in the form of dividend payments), even factoring in the chaos of 2022.

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

So my recommendation is to wait with this one for now – but watch the discount like a hawk. In the meantime, check out Buy rated equity CEFs at bargain prices in my CEF Insider Portfolio for the best reduced to buy high-yield CEFs.

Michael Foster is the Lead Research Analyst for Contrary view. For more great income ideas click here for our latest report “Indestructible Income: 5 Bargain Funds With Sure 8.4% Dividends.

Disclosure: none

Leave a Reply

Your email address will not be published.