How to Invest 7%+ Dividends as the Market Changes

We all know the market is shifting – now is the time for us to stop and see what this means for our dividend portfolio, especially our Closed-End Fund (CEF) holdings.

So today we’re going to take a step back and look at the state of the economy. (Hint: It’s not as bad as the headline author would have us believe: CEF investors are well-positioned for the next few months.) I’ll also point to the 7.4% dividend that’s currently trading at a bargain price.

History is on our side

Let’s start with corporate profits, which were better-than-expected in the first quarter of 2022, with more than three-quarters of companies across all industries reporting better-than-expected, above-average earnings growth of 9.1% year over year.

Of course, the market doesn’t really pay attention to fundamentals, choosing instead to be swayed by dire short-term headlines. But look closer, and you’ll find the stock is cheap, with a price-to-earnings ratio below its five-year average, about where it was in early 2015.

If you had bought the stock at this price eight years ago, you would have earned an annualized return of 11.5% between then and now, even with the most recent sell-off, as of this writing.

Employment and income are strong

I probably don’t have to tell you that unemployment is low right now. In fact, the latest reading was 3.6%, a 50-year low! Revenues also hit record highs.

Of course, when it comes to the economy, everything is interconnected, so it’s no surprise that low unemployment and high wages are translating into strong corporate profits. The bridge between wages and profits is consumer spending, which is also maintaining:

The gains you see above aren’t just due to higher gas prices. If you look at the first four months of 2022, excluding spending at auto and parts stores and gas stations, retail sales are up 10.3% from the same period in 2021.

What about inflation?

Clearly, inflation is part of the reason retail sales have grown so much. But there are also early positive signs here, with price increases slowing slightly in May.

I expect further declines in the coming months, partly due to “base effects,” as prices start today compared to a year ago, when prices rose due to pandemic shutdowns. Additionally, April’s decline in inflation relative to March suggests that China’s COVID-19 lockdown and the Ukraine war haven’t created enough supply chain pressure to trigger runaway inflation — another piece of good news.

As far as the market goes, they haven’t priced any of these “buds” yet. As they do, I expect less headwinds and more tailwinds for the stock.if inflation real For example, if it turns lower, we can see that the market is indeed turning very fast.

CEF pays us a big dividend while we wait for a rebound

The good news for us long-term CEF investors is that we can buy today at a deep discount to net asset value (NAV, or the value of our holdings in our CEF portfolio) and get 7%+ A generous dividend while waiting for the market to “catch up” and move up.

CEF like this BlackRock Enhanced Equity Dividend Fund (BDJ) is one way to do so.Its 7.4% dividend yield is maintained by a diversified portfolio of large U.S. companies, with a significant portion (24% of the portfolio) invested in financial stocks such as FuGuo bank
World Financial Center
(WFC),
Citigroup
C
(C)
and American International Group
American International Group
(American International Group).
All of these companies have benefited from rising interest rates, but have all been caught up in the latest sell-off.

What’s more, as shown below, management has increased the fund’s payout over the past five years, held steady during the COVID-19 slump, and even issued two large special dividends during that time.

That, combined with BDJ’s 5.1% discount to NAV, means you’re putting these oversold stocks into an oversold fund — effectively giving you double the discount.

Michael Foster is Principal Research Analyst Contrarian Outlook. For more great revenue ideas, click here to view our latest report”Unbreakable Income: 5 Cheap Funds With a Safe 8.4% Dividend.

Disclosure: none