This market’s insistence on falling, even as earnings soar, has opened up a strong buying opportunity for US dividend investors.
And we’ll exploit it to take advantage of a rare “double discount” on an 8% return closed-end fund (CEF) this person’s noticed. This revenue and growth machine has soared 260% since its inception and has the potential to crush stocks this year, thanks to its undeserved markdown.
More on that below. Let’s talk about this market disconnect first, as recent declines have caused the S&P 500’s price-earnings ratio to drop to 23.8. It may not sound cheap, but it is far below last year at this time, when valuations reached a nosebleed of 43.7.
It’s a complete disconnect from the earnings trend, which is spectacular:
This chart tracks S&P 500 company earnings in the fourth quarter of 2021, and what we’re seeing is one of the best quarters on record. A whopping 77% of companies saw earnings per share beat expectations, with earnings 8.6% above S&P 500 company forecasts for the end of 2021.
This just continues a trend we’ve seen throughout 2021.
Overall, earnings grew by nearly 90% in 2021. While much of this is due to the fact that 2020 was a terrible year, the fact is that earnings growth is set to continue, with companies anticipating an increase of 5.5% for the first half of 2022. Economists expect GDP growth of more than 3% for the full year.
The Fear Factory
With so many strong economic indicators and strong earnings growth behind us, stocks should ascend. So why aren’t they?
While geopolitical chaos is definitely a near-term drag, stocks began to slide ahead of the Ukraine crisis as investors weighed inflation risks for the wider economy. This risk was heightened in the press with article after article saying that soaring food and gasoline prices were dragging more people into economic stress.
The only problem? This is not entirely true.
A surefire way to see if Americans are struggling is to see if they are going into a lot of debt to survive. And while credit card debt has increased over the past year, it’s nowhere near where it was before COVID and isn’t even where it was in 2008, when fewer Americans had credit cards and consumer prices were much lower.
When we look at Americans’ incomes, things look brighter than ever.
Although revenues briefly dipped due to COVID-19, they remain at their highest level in history, barring the late-2020 spike in stimulus checks.
And while the data doesn’t show that Americans are as wealthy as what made them unique, it does show that they are wealthier than they were before COVID-19 — and by a wide margin. Add to that a historically low unemployment rate of 4% and I think you’ll agree that we have a much rosier economic picture than the media would have us believe.
How to buy with a big “double discount”
With such strong economic fundamentals in the US, it’s pretty obvious that the recent market sell-off is way overdone.
We can turn to history to see how a sell-off like this could happen: there was a similar drop in early 2016, in a similar economic climate (just as then, markets brace for the Fed begins to raise rates as the economy recovers after many generous bouts of quantitative easing). And shares have soared ever since.
Bargain priced CEF gives us a second discount offer
Now you can simply buy the S&P 500 through an index fund like the SPDR S&P 500 ETF (SPY) and be done with it. But why do that when you can get many of the same stocks even cheaper – and with a dividend six times what SPY pays?
With a CEF like the Nuveen Core Equity Alpha Fund (JCE), you get both of those things, thanks to its 8% dividend yield and its discount to net asset value, or net asset value.
This is a discount that only exists with CEFs (ETFs, on the other hand, always trade at par). And in JCE’s case, that equates to a 5% “bonus”: while JCE’s portfolio might be liquidated for around $250 million today, JCE’s stock is actually valued at around $238 million. dollars. So with JCE you get great actions like Apple
In addition, JCE recently increased its dividend by 30%, thanks to its outsized gains in recent years. Go back further and you see it has an incredible track record behind it: even after the recent massive sell-off, JCE has grown over 260% in the last 15 years.
I think you’ll agree that JCE, with its double discount and rising 8% dividend, is a much better solution than buying an ETF, especially in today’s uncertain market.
Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 7.5%.”