This 7.3% Dividend Payer Is Built For This Weird Market

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In a falling market like this, it’s important to play the long game. For us Closed-End Fund (CEF) investors, that means staying invested, because we just don’t do that (Unavoidable!) Wanting to be out of the market when there is a boom.

More importantly, we need to keep our income flowing. They have never been more important than they are now. And CEFs are throwing up some pretty healthy payouts these days, with the average CEF yielding north of 7% as I write this.

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but there Huh There are things we can do to further strengthen our dividend and reduce the volatility of our portfolio. One strategy is to look at CEFs that sell covered calls. This is a low-risk way for these funds to generate additional income, which they pass on to us in the form of dividends.

A covered-call CEF that should be at the top of your list is Nuven S&P 500 Dynamic Overwrite Fund (SPXX), 7.3% The yield, as the name suggests, puts all the blue-chip companies in the S&P 500.

So if you’re holding a go-to index fund, SPDR S&P 500 ETF Trust (SPY), With its 1.3% yield, you can drop the “Y” at the end of its ticker and the sub “XX” and get a dividend nearly six times bigger. from the same underlying stock.

We’ll end the strategy and story of SPXX in a moment. First, though, it’s important to fit the fund into the economy we’re working in right now, because I think we can all agree that this is a bizarre and difficult time, with stocks falling, corporate profits right now. is also rising (despite last week’s disappointing earnings reports from Wal-Mart and Target) and inflation is running hot. Funnily enough, this is actually a good setup for SPXX.

Look beyond the headlines on inflation

Let’s start with inflation, which accelerated to 8.3% in April. It’s undoubtedly high, but there are some underlying trends here that are important to note—and that you rarely see discussed in the press. They both feed into SPXX’s outlook nicely.

First, inflation is actually ticking down (albeit slowly) from 8.3% in April to 7.6% in May, according to a recent survey of economists. That’s good news, but there’s another narrative that’s being missed here: Companies are using inflation as an excuse to increase prices across the board. After all, if they were simply passing their rising costs to consumers, would corporate profits look the same as they do now?

Not at all! This is disappointing, this is an opportunity for us, which we will use with SPXX.

And the truth is, this approach is still working for Corporate America, and it’s likely to continue for a few months, as there are still plenty of signs that American consumers are happy to pay.

To see what I mean, consider food prices. Broadly speaking, in contrast to inflation, which ticked down in April, as we just saw, food costs remain high, having jumped 10.8% from the previous year. You’d think this would prompt Americans to cut their overall spending, with more of their money going to the grocery store cash register.

But it is not so now. You see, when Americans cut back, usually the first place it shows up is in restaurant spending, the last of the discretionary purchases.

Right now, though, the opposite is the case: Restaurant sales jumped 19% in April from a year earlier, indicating that high inflation isn’t prompting Americans to cut costs and stay home. (And of course, you could argue that we’re comparing sales last April to those in April 2021 when lockdowns were widespread, but restaurant sales were up 2% in April compared to the previous month. increased.)

This, of course, sounds surprising, but it highlights the huge amount of money consumers have saved during the pandemic – money they are still working on spending. In turn, this is prompting companies to raise prices.

The real story behind the market correction

So if profits are still rising and consumers are still flushing, why are shares sold so aggressively? The Fed’s rate hike is certainly one reason. But in other ways, it’s a nice inversion of the old fashioned way to the mean.

Let’s look at both recent and distant history: Over the past five years, stocks have gained 11.6% annually. But over the past century, the stock has risen an average of about 8% per year, so we’re doing much better than average even after the sell-off.

But did we stay at the price level we were holding before this Close the sale, we’ll be looking at a 14.5% annualized return over the past five years, or nearly double the long-term average.

A correction was healthy, especially before the inflation data looked better. Now that it is correcting (again, albeit slowly), it is starting to get a bit long in the sell tooth.

But according to historical research, corrections can take about six months to find the bottom, and the market’s peak was about 5.5 months ago, so the stock could be on the right side for a while.

7.3% dividend made for this reshuffle market

This brings us back to the SPXX, which, as I said, is designed for a situation like this because the fund buys us in the S&P 500 and collects a dividend of 7.3% of it.

Then there is the SPX’s covered-call strategy which, as I said earlier, works well in volatile markets. A covered call is a type of contract that gives speculators the option to buy shares of our CEF in the future at a price specified in the contract. In return, speculators hand over the cash, which the fund pays us as dividends.

There are two ways these deals can be executed: either the stock hits the price—called the “strike price” in options-speak—and is sold (or “called away”) or it doesn’t. and maintains funds. , The key is that the fund gets to keep the amount it charges (called the “premium”) somehow.

This is backed by SPXX’s higher dividend, which, in turn, gives you higher returns in cash. And if you allow those funds to accumulate in your portfolio, they will act as a natural stressor to your investments and help reduce your overall volatility.

Michael Foster is Lead Research Analyst Contrarian Outlook, For more income ideas, click here for our latest report”Indestructible Income: 5 Bargain Fund with a safe 8.4% dividend.,

Disclosure: none

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