How ‘Economic Grumpiness’ Will Hand Us A Sweet 9.8% Payout

Here’s something you might be surprised to hear: according to the numbers, the US economy is actually doing well—and yet (almost) nobody wants to admit it!

It’s a misconception we income investors can exploit with the three high-yielding picks we’ll cover below.

It’s a weird turn of events, but it makes sense. Since the pandemic, itself an event of shocking turmoil, it seems that the chaos around the world is getting worse, and our fundamental hope for humanity makes us think that this just can’t be good for growth.

Except that’s not how things typically play out.

After World War II, the US economy grew 3.8% annually, on average, for over two decades, far more than the 1.7% average we saw in the following 41 years as the world grew more stable following the end of the Vietnam War, the fall of the Soviet Union, and with growing trade with China and so on.

That is, until September 11, 2001, ushered in greater uncertainty … and America’s GDP suddenly grew by an annualized 4.5%.

I don’t know why this happens—no one does. But it’s a pattern that has played out for over a century in many different ways. I’m just giving you a very broad stroke here.

So, it kind of makes sense that the economy is poised for more growth as we face more uncertainty, tragedy and worry. Maybe it’s because all of those bad things spur people to find solutions, and many of those solutions result in more spending and prosperity.

That’s not just a hopeful vision for the future—it’s one we can make money from.

How to Invest in the Future Now

The dissonance between economic indicators and public perception, as outlined in a recent Wall Street Journal article, has crafted a silver lining for astute investors: the stock market is relatively cheap.

The stock market’s current valuations, due to pessimism, beckon a rare opportunity to capture value. It’s time to navigate through this juxtaposition by exploring three funds, ranked from worst to first, we can use to profit.

Pick No. 3: SPDR S&P 500 ETF Trust (SPY
PY

SPY
)

A common holding in a lot of investors’ portfolios, SPY mirrors the S&P 500, offering broad exposure to the US economy with very low management fees.

However, because SPY is an ETF and not a closed-end fund (CEF)—more on those next—it never trades at a discount to net asset value (NAV, or the value of the stocks in its portfolio).

That, plus a modest dividend yield below 2% somewhat dull its shine. SPY’s appeal lies in its replication of the broader market’s performance, yet the absence of a significant income component leaves us cold. Our runner-up doesn’t have that problem.

Pick No. 2: Liberty All-Star Equity Fund (USA)

USA takes the income story to another level while also offering its portfolio of US mid-cap and large-cap equities for less than their actual value on the market today.

That’s because it’s a CEF sporting a 3.1% discount to NAV and a hefty near-10% dividend yield as I write. It not only holds large caps like Alphabet (GOOGL), Visa (V) and Microsoft

MSFT
(MSFT), but it lets investors buy at a discount while yielding 9.8%, with a payout growing at the same rate as that of the S&P 500—up about 60% in the last decade. (Note that this fund and our #1 pick, up next, pay dividends as a percentage of their portfolio value, so they do float around a bit. But that’s fine with us. We’re happy to let these well run CEFs “convert” our gains into cash!)

That makes it a smart buy now, but it’s not quite as good of a deal as our best buy of this trio:

Pick No. 1: Liberty All-Star Growth Fund (ASG)

Our next buy is USA’s sister fund, ASG, which also shines with a rapidly closing discount and an 8.6% yield. But unlike USA’s broad market approach, ASG, a holding of my CEF Insider service, has a focus on growth stocks like SPS Commerce (SPS), a supplier of software for managing supply chains, as well as large caps like Amazon.com (AMZN), Visa and UnitedHealth Group

UNH
(UNH).

The market suddenly realized ASG was oversold a couple weeks ago, effectively suggesting that CEF investors—who tend to be more cautious than stock investors—are ready to admit today’s pessimism is overblown. After all, ASG has a long history of outsized returns!

If CEF investors are waking up to how overdone their worries about the economy have been, this is good for CEFs across the board. It also means ASG’s discount is destined to vanish, bringing back the 8% average premium at which the fund traded in the half decade before last year’s selloff.

That sets up a nice window to buy now, collect ASG’s high payouts and then sell when it returns to its historical premium.

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 10.9% Dividends.”

Disclosure: none