This 7% dividend is available with a rare “double discount” (which won’t last)
IInvestors are far too pessimistic about the economy. And their gloom – driven by the mainstream press (as usual) – sets us up for a rare “double discount” on closed-end funds (CEFs) with yields above 7%.
I say “double discount” because nearly everyone misinterprets some of the latest economic signals – and that leads them to sell stocks (and CEFs!) at at exactly the wrong time.
This error – which is responsible for much of the decline we have seen in the markets since the start of the year – is the No. 1 discount.
And we will get the #2 discount by buying CEFs which are also trading at unearned discounts. Specifically, we are looking for CEFs with significant exposure to the retail sector, which fell most unfairly at the start of 2022.
A good example is a CEF called General American Investors (GAM), which has returned 7.3% over the past 12 months and is trading at a ridiculous 16% discount to NAV as of this writing.
We’ll talk more about this unique income producer in a moment. First, let’s set the scene for the number that most people misinterpret – and see how that gaffe sets up our double discount opportunity.
Why does this rare “double discount” exist?
The number at the heart of our opportunity is the retail sales figure for December, which came out on January 14th. According to the Commerce Department, sales fell 1.9% last month from November, a near-unprecedented decline when, normally, an increase in holiday spending drives sales skyrocketing.
And it wasn’t Omicron. E-commerce sales weren’t much stronger either. It’s almost like everyone stops buying stuff. This has hit the retail sector hard as we see SPDR S&P Retail ETF (XRT).
Buyers are cutting back–or are they?
XRT is a useful barometer because its holdings, including Nordstrom (JWN), Victoria’s Secret (VSCO), Kroger (KR) and Amazon.com (AMZN), run the full gamut of retail businesses.
This is where things take a 180 degree turn, as this 1.9% drop is calculated on a seasonally adjusted basis. If we don’t adjust the numbers, total retail sales of $715 billion in December were up 10% from $649.9 billion in November 2021.
Data source: United States Department of Commerce
In normal times, we would no doubt follow the seasonally adjusted numbers, as the Commerce Department uses a total of expenses across all components (auto sales, energy, restaurants, apparel, pharmaceuticals, building materials, etc. .) to adjust based on what people tend to spend more or less of in a given month. This eliminates any irregularities that may arise because, for example, people go to restaurants more in July than in November.
Of course, we don’t live in normal times.
Due to COVID-19 and supply chain issues, data for the past two years has been volatile to say the least. People go from spending more in restaurants to spending more in grocery stores, for example, and vice versa. The changes are unprecedented, and they separate the seasonally adjusted numbers more than ever from reality.
This means that until a more stable spending pattern emerges, it doesn’t make sense to use the adjusted numbers. We will therefore instead turn to the unadjusted figures. And they tell a very different story.
Data source: United States Department of Commerce
First, note that December 2021 saw an increase of 16.9% compared to the previous year. Additionally, December 2021 spending is up 19.6% from pre-pandemic!
Now, I don’t want to sound too optimistic here. Inflation remains a problem, with the consumer price index up 7% year-on-year in December. But even taking that into account, retail sales were still up more than 12% from pre-pandemic. No matter how you slice it, people are spend more in stores. The data is just noisy due to the unique economic times we are going through.
How We’ll Exploit This Misconception For Big Gains (And Over 7% Dividends)
That’s why we have a nice “double discount” ahead of us: a buying window for equity-focused CEFs. While inflation is far from resolved, rising prices due to inflation are also causing corporate earnings and, as we see in the chart above, sales, on the rise.
All of this should contribute to a strong earnings season, which will begin in earnest next week. Add to that the recent market pullback and you have a strong chance of a rebound in equities, as this surprise rebound in earnings surprises overly pessimistic investors.
This is where our aforementioned choice, General American Investors (GAM), one of the oldest CEF in the world (founded in 1927!), enters the scene.
This fund paid a dividend of 7.3% last year, and is currently trading at a 16% discount to net asset value. GAM has paid around 7% (and sometimes more) for years, thanks to its focus on value investing and finding stocks that are oversold during a panic, as we are seeing right now. (The company is paying most of its dividend as a one-time special payment to give its management team the dry powder to tackle trading stocks in the face of a downturn — a smart strategy.)
And with Amazon (AMZN), Apple (AAPL), Nestle, TJX Companies (TJX) and Berkshire Hathaway (BRK.A) as a premier wallet, it is also very well positioned for the rebound in retail.
5 “Safety First” choices offering reliable 6.9% performance (perfect for 2022)
Here’s another thing few people realize about FECs: they have an amazing safety record!
Here’s what I mean: of the 324 CEFs that have been around for ten years (or more!), only 13 have lost money in the past 10 years.
That’s a 96% success rate!
That’s pretty incredible on its own, but there’s another twist: of the 13 CEFs that lost money, all but three were in the energy sector. Get rid of those 10 stragglers and the win rate for those CEFs jumps to an incredible 99%!
I think you’ll agree that a balance sheet like this – with the big dividends that CEFs offer – makes these funds a very a great antidote to the uncertainty we face today. Because if you get a good 7% (and often more) in safe cash dividends, you can pay much less attention to daily market fluctuations.
I’ve put together my top 5 CEF picks for the coming year that yield a healthy 6.9% on average, and I want to share that list with you now. Go here and I’ll give you everything I have on these 5 ATMs – names, tickers, current yields, best buy prices, my full management team analysis of each fund, strategy, holdings and more.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.