Last week in this column, I said it was time to buy. Today, we’ll clarify that timeline.
Buy and hold forever? Nah. Not now. Maybe never again!
To everyone that shook their head at this careful contrarian last week, thinking there is too much uncertainty in the world, well, I agree with you. The “threatdown” is real—which is why I’m not interested in holding names until the end of time.
We have conflict in the Middle East, a still-hawkish Federal Reserve, spiraling government debt and stubborn inflation. The news isn’t pretty.
That said, precarious markets create short-term and medium-term opportunity. There’s no such thing as a good stock. But there is a good setup, and we have that right now. So long as we don’t overstay our welcome.
With that, let’s discuss my four steps for 49% total returns from the safe dividend payers that we all know and love.
Step #1: Buy Now, Panic Later
Not to make light of the unfolding war and risk factors, but as contrarian investors, this is when we go shopping. We buy panics.
Blue-chip stocks actually bottomed weeks ago. More than $28 trillion in stocks sank to new one-month lows on Tuesday, September 26.
Translation: The big names were being dumped in a fire sale. When everything hits a new low, nobody’s thinking rationally. This was a selling panic on par with the ultimate market lows in October 2022. A complete wash.
For us? A “close our eyes and buy” contrarian moment!
Fast forward to Tuesday, October 3. The S&P slumped to new index lows. And the 10-year yield hurdled 4.8% in the overnight trading session. It jumped past 4.9% briefly later in the week.
The collective one-month lows fell. Just short of $21 trillion. Bad but less bad—which is when the easy money is made.
The selling pressure is subsiding. You’re seeing that now. Stocks sailed Monday “out of nowhere.”
When there’s nobody left to sell, lows are formed.
Step #2: Buy What? Dividend Payers at Discounts, of Course!
Federal Reserve Bank of San Francisco President Mary Daly recently admitted that, thanks to the rising 10-year rate, the Fed is likely done.
If financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished.
Fedspeak translation: The bond vigilantes did our dirty work for us. We don’t need to hike again.
The rate hike cycle is effectively over. Which means right now is the time to buy dividend stocks. Before they sail!
We’ve often discussed the Gabelli Dividend & Income Trust (GDV), managed by legendary value investor Mario Gabelli, as a top-notch CEF. Today, we have a rare opportunity to buy Mario’s portfolio for just 83 cents on the dollar (thanks to its 17% discount to net asset value, or NAV).
Remember, CEFs have fixed pools of shares, so they can (and do) trade higher and lower than their NAVs, or “fair” values (assets minus liabilities). As contrarians we can step in when they are temporarily out-of-favor, as after a pullback when liquidity is low, and buy them at generous discounts.
GDV holds blue-chip dividend payers and growers such as Mastercard (MA), Microsoft (MSFT) and Honeywell (HON). These stocks are already cheaper than a month ago, and with GDV, we have an opportunity to purchase them for another 17% off.
These high-quality stocks wouldn’t normally qualify for our CIR portfolio because everyone in the world knows they are great shares to own. Even though these companies are always raising their dividends, constant demand for their shares keeps their prices high (and current yields low). So, they never meet our current yield requirement.
GDV gives us a way to have our dividend and enjoy some additional upside in these high-quality dividend shares. The fund pays a sweet 6.8% annual yield monthly!
Step #3: Know When to Hold ‘Em
Kenneth Ray (“Kenny”) Rogers knew when to hold ‘em—and fold ‘em. He bid us farewell on March 20, 2020, sidestepping the societal dumpster fire that was about to ensue.
You got to know when to hold ‘em
Know when to fold ‘em
Know when to walk away
And know when to run
-Kenny Rogers, The Gambler
Today we celebrate Kenny’s life, his music and his wisdom by appreciating the pop a payer like GDV can give us if we buy during times like these.
GDV is all about timing. When we last held it from October 2020 until February 2022 it rewarded us with 49% returns in just 14 months.
Step #4: Know When to Fold ‘Em
Since we last sold GDV, it meandered through a meaningless existence, losing 14%:
A Time and a Place for GDV
And by the way, GDV has paid its dividend every month as promised. Payout safety was not the issue. The fund declined because the stocks it held dropped in value.
This is why we buy GDV at market bottoms only. When nobody else wants the thing.
We can think of GDV as the “breakfast beer” of CEFs. There’s a time and a place. We want to imbibe at market lows and refrain as the tide turns.
Well, it’s time to hoist that glass again my friend. Cheers to GDV! Just make sure, as always, that we don’t overstay our welcome.
Unfortunately, I don’t have you on my list to receive my buy and sell alerts! In this Post-COVID Portfolio world, we can’t just sit on our hands.
We must book profits opportunistically. Otherwise, we’ll lose our dividends when prices reverse.
This is the time to buy. Please, let me tell you what to buy and, more importantly, when to book the profits. Please click here to try my Post-COVID Portfolio, filled with big dividends, on a risk-free basis.