The recession everyone’s been worrying about is still a mirage—and there’s a good chance it won’t become reality for a long time yet. That’s given us a nice momentum play in one closed-end fund (CEF) throwing off an outsized 8.2% dividend.
Here’s what I mean by “momentum” play: the stock market is only now waking up to the fact that the recession appears to be on ice for the foreseeable. Yet at the same time, those recession fears have left us with some terrific discounts in CEFs.
These “delayed reaction” buys—including the ticker we’ll discuss below—won’t last.
I say that because the signs are all there for continued market gains—even if the media is working overtime to tell us otherwise. Consider, for example, the latest jobs report, which helped drive the S&P 500 higher last week.
Last month, 339,000 jobs were added, far above the 190,000 economists were looking for. Yet unemployment rose to 3.7%, a sign employers aren’t scrambling for workers to the degree they were in 2021. That takes some of the heat off the Fed to continue rate hikes, as the tight labor market has been one factor driving up inflation.
In other words, we’ve got ourselves a pretty rare “Goldilocks” setup here.
Of course, more jobs mean more workers with more money to spend. That’s why the S&P 500 is up over 10% this year, with more gains likely. Which brings me back to that much-ballyhooed recession—and why it still appears to be far out of sight.
Back in April 2022, the US Treasury yield curve inverted, with the yield on the 2-year climbing higher than that of the 10-year. This is important because every time it’s happened in the past, a recession has ensued. Hence the stock selloff last year, as everyone tried to get ahead of said recession.
Except more than a year later, well, we’re still waiting—and there’s no sign a recession is in the cards.
GDP Gains Still Strong
The US started 2023 with 1.3% GDP growth—not huge, but not bad, either. And that was much better than the two GDP declines we saw in early 2022.
While the economy did contract for two consecutive quarters in early 2022, meaning the US experienced a technical recession for those six months, it’s been expanding since, and the recent jobs report shows it will keep doing so.
Perhaps the inverted yield curve, which has been a reliable indicator of recessions going back to the 1970s, showed up during the recession instead of slightly before, as in the past. When you’re dealing with unprecedented global economic shutdowns, anything’s possible.
Still, a close look at the data shows we’re nowhere near a recession, which explains why the tech-heavy NASDAQ has outpaced the Dow and the S&P 500 this year.
And with the NASDAQ still well off its 2021 highs, it’s not too late to get in here.
We can give ourselves some extra upside by going with a closed-end fund (CEF) with a bias toward tech: the Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY), whose top holdings include Microsoft (MSFT), Apple (AAPL), Amazon (AMZN) and Meta Platforms (META).
ETY holds about a quarter of its portfolio in tech, which is its highest allocation, but its next three-biggest sectors—health care, financials and consumer discretionary stocks—remain oversold, despite this year’s market rally.
This means that overall, ETY gives us a “one-stop” buy for gains and high dividends in the current market. Better still, the fund is a bargain, having fallen to a 2.9% discount to net asset value (NAV, or the value of its underlying portfolio) from the premium at which it started the year.
The discount is small, but that’s fine. ETY has traded at a 10% premium in recent years and at a 5% premium a few times before that, so we’ve still got a nice entry point here.
One other thing: ETY sells call options on its portfolio, which provides extra income to fuel that 8.2% payout. This strategy does, however, hold down the fund’s gains in a rising market, as the stocks on which it sells options are “called away.” This is why ETY has tracked the S&P 500 in the last three years, despite its tech-stock lean.
This essentially means ETY is converting the market’s return into dividend cash with its 8.2% payout, which is a far better proposition than, say, holding a low-yielding index fund. Add in the unusual discount and you can see why ETY is a smart short- to medium-term buy now.
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 Steady 10.4% Dividends.”
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