I wouldn’t freak out now. In fact, I’d use this market swoon to go shopping—and pick up dividends for dimes on the dollar.
My favorite idea today is an 8.5% yield that—amazingly—trades at a 28% discount to its NAV (net asset value). That’s a dollar for 72 measly cents!
I’ll share the specifics in a minute. First, let’s calm down. The time to sell was five short weeks ago, when we discussed the likelihood that another short-term top was in:
I’m talking about the dividend dogs that, if we’re being honest, are not deserving of long-term positions in our retirement portfolios.
These mutts have had a great summer—good for them (and us). Now let’s find them a nice home in another portfolio.
September swoons are common. The Wall Street guys return from their Hampton homes and sell everything that rallied in August.
That’s exactly how it played out. And now, traders are betting on a continuation of this decline at a record clip.
But markets rarely move in straight lines, up or down. Given the prevailing level of pessimism, my bet is on another bounce, of all things.
And my favorite way to play a near-term pop is with discounted dividends.
I’ve got my eye on a unique income fund that collects big yields from private holdings. Bond guys and gals don’t usually venture into this space. But this fund’s savvy manager does—and he’s rewarded investors with secure “preferred” yields up to 10.25%.
His fund, which we can buy as easily as any stock or ETF, usually pays between 7% and 8%. But his dividend is temporarily inflated to 8.5%, thanks to the panicked selling on Wall Street.
The yield is high because the fund’s price is impossibly cheap. It is trading at an unheard of 28% discount to NAV, which means it is selling for just 72 cents on the dollar. That’s right, the fund could be liquidated today at a premium to its current price.
3 Ways to Win with an Impossibly Cheap Fund
But why would management do that when it has 10.25% coupons locked in? Sure, the price is under pressure now that rates are rising. But this won’t last because the Fed is eventually going to cause a recession.
In recessions, rates fall and bond prices rise. Slowdowns are the “cure” for what ails the bond market.
Sooner or later, the recession will arrive. The Fed is employing a “hammer time” policy. We warned about this as recently as July, well before Jackson Hole and last week’s meeting:
When the Markets sniff out tightening, they throw a big fit.
Let’s wait for Fed’s song to end before we go shopping. In hammer time, all asset prices are likely to get, well, hammered.
Stocks sure have been plowed. Bonds, too. But as I mentioned, we have hope on the horizon for our favorite fixed income funds.
(Sure, the “light” at the end of our tunnel is a recession train coming our way. That’s OK. It means we’ll be able to hop on and buy bonds when it gets here.)
And the best bonds to buy will be those that pay safe and heavily discounted dividends like the fund I mentioned.
Now I’m not sure how long this bounce will last, which is why I hesitate to share the name and ticker with you here. We may need to book quick profits and get back to the sidelines.
While we have incredible dividend deals available today, markets are rallying (and rolling back over!) faster than ever. We need to be nimble to take advantage.
But oh, the potential gains! Eight-plus percent dividends at 28% discounts. Crazy. We’re looking at fast double-digit potential returns.
— Brett Owens
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Source: Contrarian Outlook