Pullback Buy Alert: These 6.7% Dividends Have Big Gains Ahead

Retirement

Volatility is back! With the market whipsawing again, you’re likely seeing more red in your portfolio these days.

At times like this, you might be tempted to give in to emotion and sell. That’s understandable—self-preservation is, after all, our most powerful instinct.

But keep your nerve. Because now is the time for contrarians like us to get greedy for yield—and upside.

Here’s why: American companies’ earnings are strong, their revenues are rising, and there are no indications of a recession anytime soon.

I’ll go through these points one by one, because it’s important to see how the data disagrees with the panicky noise the media publishes these days. Then I’ll show you two ways to play into this market—both throw off juicy dividends of 6.7% and even 7.4%.

Just the Facts

So far, 77% of S&P 500 companies have reported second-quarter earnings and three-quarters are showing profits above estimates.

That’s a huge surprise. And bear in mind that before companies began reporting, expectations were for a 4.2% profit decline. But so far, we’ve seen earnings fall just 1%.

That may sound bad, but remember that this 1% earnings decline was more than priced in, thanks to 2018’s bear market. More importantly, a 1% drop in a quarter is nothing. Earnings are still up over 30% in the last three years.

It’s also critical to look at where the earnings declines are focused: materials and industrials. Those drops are actually good for the rest of the market because companies like health-care firms, utilities and consumer-discretionary producers depend on materials and industrials to make their products. Weaker prices in those areas mean bigger profits elsewhere.

Top Line Tells the Tale

And there’s yet another positive indicator: revenue growth has smashed expectations. Previously, there was an expectation of a 3% sales increase for S&P 500 firms, but so far that’s come in at 4.1%, and the growth rate has been going up as more firms report. This means demand for goods and services is still rising, which suggests we’re nowhere near a recession.

The key takeaway? When you ignore the scary headlines, you quickly realize that the American economy is just fine.

And because of the recent downturn, your upside from now to the end of the year has increased. When the investors stop panicking about the trade war noise (which has proven to have little long-term impact on stock returns in the US over the last two years), this latest downdraft nicely sets stocks up to make a nice move higher.

How to Profit

What should you buy?

Well, you could take the route many folks do and buy the SPDR S&P 500 ETF (SPY), a low-cost index fund that tracks the S&P 500 and will give you roughly the same return as that index over the long term.

Over the last 10 years, the S&P 500 has returned 13.2%, on average, per year. Put another way, if you were to extrapolate this return over three decades and put $1,000 per month in this fund every month, you’d have $3.6 million after a 30-year career.

2 Ways to Tap the S&P 500 for 6.7%+ Dividends

But what if you’re not starting your career now and you’re facing retirement in 10 or 15 years?

What if you want to retire now? That’s where my two high-yield plays come in. Both are a unique type of fund called a closed-end fund CEF.

The first is the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX), which has all the S&P 500 companies: Microsoft (MSFT), Apple (AAPL), Amazon.com (AMZN), Facebook (FB), JPMorgan (JPM), Visa (V) and so on. But SPXX also has a 6.7% dividend yield, much more than SPY’s 2%. That has huge relevance to retirees.

Anyone looking for passive income will get a measly $842 per month from SPY on a portfolio of $500,000, but SPXX’s bigger yield means getting $2,792 per month—higher than the average income in America. All while getting the same exact stocks that you’d get from SPY.

And SPXX isn’t the only option; if you want returns better than the S&P 500, you could pick up the Eaton Vance Tax Advantaged Dividend Income Fund (EVT), which is up 14.3% annualized over the last decade. It also hands over a 7.4% income stream to investors. That’s over $3,000 per month in income, over three times as much as SPY pays out.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.5% Dividends.”

Disclosure: none

Products You May Like

Articles You May Like

6 steps to take now so your financial life will be off to a good start in 2020
How to score a tax break for your charitable giving
Luxury Real Estate Agents Hold Twilight Open Houses To Showcase Their Multimillion-Dollar Listings
Federal, State Focus On Elder Financial Abuse Seen As Potential Reason For Tripling Of Reports In Six Years
What to think about before you gift a Peloton or other big-ticket item this holiday

Leave a Reply

Your email address will not be published. Required fields are marked *