An Oversold 7.4% Payer With Upside

05/26/2022

3 minutes read

2022.05.26 14:41

We all know the markets are undergoing a shift—and it’s time for us to stop and take a look at what it all means for our dividend portfolios, particularly our closed-end fund (CEF) holdings.

So today we’re going to step back and look at the economic state of play. (Hint: it’s not as bad as the headline writers lead us to believe) I’ll also name a 7.4% dividend that’s currently trading at a bargain price.

History Is on Our Side

Let’s start with corporate profits, which came in better than expected in the first quarter of 2022, with over three-quarters of companies across all sectors reporting earnings above expectations, more than the average, with earnings up 9.1% from a year ago.

An Oversold 7.4% Payer With Upside Q1 Earnings Sectors

Of course, the market hasn’t really paid attention to fundamentals, choosing instead to be moved by scary, short-term headlines. Look closely, though, and you see that stocks are cheap, with a P/E ratio below the five-year average and about where it was in early 2015.

An Oversold 7.4% Payer With Upside SPY – Forward P/E

If you’d bought stocks when they were at that price eight years ago, you would’ve earned a nice 11.5% annualized return from then to now, even with this latest selloff, as of this writing.

2015 Has a Lesson for Today’s Investors
SPY-Solid Performance

Employment and Incomes Are Strong

I probably don’t have to tell you that unemployment is low now. In fact, with the latest reading at 3.6%, it’s the lowest it’s been in 50 years! Incomes, too, are at an all-time high.

Incomes Jump
US-Median Income

Of course, when it comes to economics, everything is connected, so it’s no surprise that low unemployment and higher wages are translating into strong corporate profits. The bridge between wages and profits is consumer spending, which is also holding up:

An Oversold 7.4% Payer With Upside Total Retail Sales Climb

The gain you see above isn’t just because of higher gas prices. If you look at the first four months of 2022, retail sales, excluding spending at motor vehicle and parts shops and gas stations, rose 10.3% from the same period in 2021.

What About Inflation?

Obviously, inflation is part of why retail sales are up so much. But there are tentative positive signs here, too, with price increases easing off slightly in May.

Inflation Eases (a Bit)
US CPI Rate

I expect further declines in the months ahead, due in part to the “base effect,” as today’s prices begin to be compared to a year ago, when prices were on the rise from the pandemic shutdowns. Moreover, the decline in inflation in April relative to March shows that COVID-19 lockdowns in China and the Ukraine war didn’t cause enough supply-chain stress to trigger out-of-control inflation—another piece of good news.

The markets, for their part, haven’t priced in any of these “green shoots.” As they do, I expect less headwind, and more tailwind, for stocks. And if inflation turns lower, for example, we could see the markets turn around very quickly, indeed.

CEFs Pay Us High Dividends While We Wait for a Rebound

The good news for us long-term CEF investors is that we can buy in today at significant discounts to net asset value (NAV, or the value of the holdings in our CEFs’ portfolios) and collect our funds rich 7%+ dividends while we wait for the market to “catch” and move upward.

A CEF like the BlackRock Enhanced Equity Dividend Fund (BDJ) is one way to do so. Its 7.4% dividend yield is sustained by a diversified portfolio of large-cap US firms with a considerable portion (24% of the portfolio) invested in financial stocks like Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and American International Group (NYSE:AIG). All of these firms are benefiting from rising rates but have been caught up in this latest selloff.

What’s more, as you can see below, management has grown the fund’s payout in the last five years, kept it steady through the COVID-19 plunge and even issued two big special dividends in that time: