Our “2022-Proof” Plan For 20%+ Gains And Big Dividends, Too
2022.04.19 13:05
I always laugh when I hear investors say you can’t time the market. Truth is, you my readers and I have done it many times! I’m going to show you my favorite way to time the market for big upside (and dividends) today.
The best way is to let you see my system in action. So let’s do that.
Think back to October 2020 for a second. With the market mess that is 2022 dominating the headlines now, you may not remember that we faced a big pullback then—just north of 10%.
It set the stage for us to “swing trade” for payouts north of 7%, and quick 49% upside, too.
The Forgotten Correction Of 2020
SPY-Price Chart
We jumped in with two closed-end funds (CEFs): the Gabelli Dividend & Income Closed Fund (NYSE:GDV) and the Eaton Vance Tax-Managed Global Diversified Equity Income Closed Fund (NYSE:EXG).
Fifteen months later, we “swung out” of those trades, having successfully timed the market for a pair of matching 49% returns.
CEF Returns 49%
How did we do it?
Aside from moving in when stocks pulled back (a correction that was clearly overdone, given the trillions being pumped into the economy by Fed Chair Jay Powell’s printing press), we decided to go with GDV and EXG above, which are CEFs—not the individual S&P 500 stocks or ETFs most folks buy.
That’s a critical difference, for two reasons:
- CEFs offer outsized dividend payouts—GDV and EXG, for example, yielded 7.3% and 10%, respectively, when we bought. Big cash streams like that lure investors when markets take a header.
- CEFs let us buy stocks at a discount through their discounts to net asset value (NAV). Thanks to these deals (which only exist with CEFs), we can buy for less than if we purchased these funds’ holdings ourselves. GDV and EXG were cheap in October 2020, trading at 16% and 12% below NAV, respectively.
What’s more, GDV and EXG hold the blue-chip dividend payers most of us own anyway, like Mastercard (NYSE:MA), Microsoft (NASDAQ:MSFT), and Honeywell (NASDAQ:HON), so we don’t even have to switch stocks to buy them.
To be sure, funds like these don’t always return 49% in 15 months; in fact, EXG and GDV have returned 75% and 56%, respectively, in the we successfully timed the market to grab similar gains in a lot less time.
Our “dividend swing trades” aren’t limited to CEFs, either: we worked the biggest crash in more than a decade to pull off a 62% gain in a little less than two years on Canadian Pacific Railway (NYSE:CP).
In the couple of years leading up to April 2020, money had been moving from transport stocks on recession fears. So when the recession landed (with a thud!) in March 2020, we followed our contrarian rule of “selling the recession rumors and buying the headline news” and bought CP.
There was value waiting to be unlocked in the stock itself, too, according to another dividend-powered buy indicator that’s paid off for us many times in the past:
No Love For A Dividend Double
CP-Price-Dividend Chart
As you may know if you read my columns, it’s unusual for a company’s share price to trail its dividend growth by such a wide margin—shares usually follow dividends higher.
When a gap opens up, it’s often a buying opportunity (note that fluctuations in the company’s dividend above are due to exchange rates, not changes in its actual payout).
So we bought—and rode along as CP’s shares reeled in its dividend (with an assist from massive demand for goods in the pandemic, of course!):
CP “Reels In” Its Dividend—And We Walk Off With A Fast Gain
CP-Total Returns
Finally, the real key with “dividend swing trades” is knowing when to take money the table. Consider Concentrix (NASDAQ:CNXC), an IT services firm we received as a spinoff of Synnex Corp. (NYSE:SNX)., which itself was an 83% winner for us.
CNXC was better than any cash dividend, soaring over 112% in the year we held it!
But by December 2021, with rates headed up and tech stocks likely to come under pressure as a result, we decided there was no reason to give back our gain, so we sold. Once again, our instincts were on the money: Concentrix has slid 10% since.
Disclosure:
