3 Funds That Profit From “Economic Grumpiness” (Yields Up To 9.8%)

| November 29, 2023

Here’s something you might be surprised to hear: according to the numbers, the US economy is actually doing well—and yet (almost) nobody wants to admit it!

It’s a misconception we income investors can exploit with the three high-yielding picks we’ll cover below.

It’s a weird turn of events, but it makes sense. Since the pandemic, itself an event of shocking turmoil, it seems that the chaos around the world is getting worse, and our fundamental hope for humanity makes us think that this just can’t be good for growth.

Except that’s not how things typically play out.

Global Turmoil = Faster Growth?

After World War II, the US economy grew 3.8% annually, on average, for over two decades, far more than the 1.7% average we saw in the following 41 years as the world grew more stable following the end of the Vietnam War, the fall of the Soviet Union, and with growing trade with China and so on.

That is, until September 11, 2001, ushered in greater uncertainty … and America’s GDP suddenly grew by an annualized 4.5%.

More Turmoil, More Growth Again

I don’t know why this happens—no one does. But it’s a pattern that has played out for over a century in many different ways. I’m just giving you a very broad stroke here.

So, it kind of makes sense that the economy is poised for more growth as we face more uncertainty, tragedy and worry. Maybe it’s because all of those bad things spur people to find solutions, and many of those solutions result in more spending and prosperity.

That’s not just a hopeful vision for the future—it’s one we can make money from.

How to Invest in the Future Now

The dissonance between economic indicators and public perception, as outlined in a recent Wall Street Journal article, has crafted a silver lining for astute investors: the stock market is relatively cheap.

The stock market’s current valuations, due to pessimism, beckon a rare opportunity to capture value. It’s time to navigate through this juxtaposition by exploring three funds, ranked from worst to first, we can use to profit.

Pick No. 3: SPDR S&P 500 ETF Trust (SPY)

A common holding in a lot of investors’ portfolios, SPY mirrors the S&P 500, offering broad exposure to the US economy with very low management fees.

However, because SPY is an ETF and not a closed-end fund (CEF)—more on those next—it never trades at a discount to net asset value (NAV, or the value of the stocks in its portfolio).

SPY Is Never Cheap

That, plus a modest dividend yield below 2% somewhat dull its shine. SPY’s appeal lies in its replication of the broader market’s performance, yet the absence of a significant income component leaves us cold. Our runner-up doesn’t have that problem.

Pick No. 2: Liberty All-Star Equity Fund (USA)

USA takes the income story to another level while also offering its portfolio of US mid-cap and large-cap equities for less than their actual value on the market today.

That’s because it’s a CEF sporting a 3.1% discount to NAV and a hefty near-10% dividend yield as I write. It not only holds large caps like Alphabet (GOOGL), Visa (V) and Microsoft (MSFT), but it lets investors buy at a discount while yielding 9.8%, with a payout growing at the same rate as that of the S&P 500—up about 60% in the last decade. (Note that this fund and our #1 pick, up next, pay dividends as a percentage of their portfolio value, so they do float around a bit. But that’s fine with us. We’re happy to let these well run CEFs “convert” our gains into cash!)

USA Offers Strong Long-Term Returns

That makes it a smart buy now, but it’s not quite as good of a deal as our best buy of this trio:

Pick No. 1: Liberty All-Star Growth Fund (ASG)

Our next buy is USA’s sister fund, ASG, which also shines with a rapidly closing discount and an 8.6% yield. But unlike USA’s broad market approach, ASG, a holding of my CEF Insider service, has a focus on growth stocks like SPS Commerce (SPS), a supplier of software for managing supply chains, as well as large caps like Amazon.com (AMZN), Visa and UnitedHealth Group (UNH).

A Time-Limited Sale

The market suddenly realized ASG was oversold a couple weeks ago, effectively suggesting that CEF investors—who tend to be more cautious than stock investors—are ready to admit today’s pessimism is overblown. After all, ASG has a long history of outsized returns:

ASG’s Huge Total Returns

If CEF investors are waking up to how overdone their worries about the economy have been, this is good for CEFs across the board. It also means ASG’s discount is destined to vanish, bringing back the 8% average premium at which the fund traded in the half decade before last year’s selloff.

That sets up a nice window to buy now, collect ASG’s high payouts and then sell when it returns to its historical premium.

Beyond ASG—Our Buy Window on These 5 Big Dividends Is Open, Too

When it comes to CEFs, we ALWAYS demand big discounts and big dividends. And I’ve got 5 other picks with dividends and discounts that will be shiny lures to income seekers as rates top out this year and “roll over” in 2024.

This quintet yields 9.8% between them and sport discounts so deep I see them primed for 20% price gains in the next 12 months.

I’m ready to share my research on all of them. Click here to learn more and get an opportunity to download a free Special Report naming all 5 of these cash-spinning funds, including their names, tickers, discounts, current yields and more.

This post originally appeared at Contrarian Outlook.

Category: Dividend Yield

About the Author ()

Michael Foster is the Senior Analyst at Contrarian Outlook.

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