My game plan for this panicked market by the Fed

Many readers ask me when this market will bottom out. We don’t know for sure, of course, because market lows are only visible in hindsight. But I would have let’s say it’s time to buy dividend-paying stocks, especially if you’re using cost-average (DCA), which you’ve probably used to build your portfolio.

DCA (or buying a fixed amount on a fixed date throughout the year, for example) is particularly effective for high-yielding CEFs, which are, of course, our pace at my CEF Insider service.

This is because of these funds’ above-average dividends and steep discounts to net asset value (NAV, or the value of stocks in their portfolios). CEF investors who DCA in CEFs can slowly build their income stream over time, reduce their volatility, and naturally capture big dividends and rebates as well.

To see what I mean, think of a CEF as the BlackRock Innovation and Growth Trust (BIGZ), the choice of a contrarian if there ever was one. Buying this fund through DCA from now on gets you your first purchase at a yield of 10.2% and a 17.3% discount on the net asset value.

This could be a good strategy if you’re hesitant to bet on BIGZ, which I can understand given that he owns small cap tech stocks like Bill.com Holdings (BIL
HAS BEEN
L), which makes back-end software for small and medium-sized businesses; Five9 (IVNF), that provides customer service software; and Axon Enterprise
AXONE
(AXONE)a software publisher for the police and the army.

Diversification, DCA Cover CEF Investors Any Way

It doesn’t matter if you’re buying all at once or on average, I still believe the time is right to buy equity-focused CEFs. And while I consider BIGZ a good choice for speculative play on an economic rebound, you should still hold a collection of CEFs with a diverse range of assets, such as blue chip stocks, corporate bonds and real estate investment trusts (REITs) . You will find those among the buy-rated CEFs that I recommend in CEF Insider.

This way you will be exposed to today’s health (and it is healthy!) economy in several ways. And if the market Is tumble, you will be well diversified and can continue to collect your high CEF dividends with peace of mind.

But I see good signs for the economy and our CEFs, even if things are likely to evolve in two steps forward, one step back, underlining the importance of high dividends (which allow us to weather the setbacks without have to sell) and a DCA approach, which naturally allows us to buy more of our CEFs when their prices are low and less when they are high.

Here are two reasons why I am optimistic:

Employment remains strong

Despite the constant stream of bad news from the media, we can take comfort in the fact that jobs are still plentiful in America:

Unemployment falls to historic lows

Americans are working harder than ever, with an unemployment rate of 3.6%, the lowest since 1969. Employees have so much power in today’s job market – what they haven’t felt for generations – that this has caused a spending rush at all levels.

Mastercard dataMY
makes it clear that we are not just seeing increased spending due to high inflation. After all, if consumers were afraid that runaway inflation would make life unaffordable, they wouldn’t increase their spending on, say, jewelry by almost 90% since before the pandemic. Yet that is exactly what we see.

Corporate profits rise despite rising costs

Does this increase in demand translate into higher corporate profits? You could say that may not be the case, because companies pay more for workers and raw materials. However, these costs are more than offset by higher sales, driving profits to 10-year highs:

The left side of this chart – the last peak in earnings in 2012 – is important because it marked the start of a bull market after the Great Recession.

That’s a good sign, because investors who bought back then — a time that closely resembles the times we’re living in now — would have earned a 14% annualized return over the ensuing decade. Despite the Federal Reserve’s interest rate announcement yesterday, I have a feeling that a decade from now those buying today may be saying something similar.

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 8.4%.”

Disclosure: none