The first week of 2024 was a rough one for stocks—and that, oddly enough, suggests we might see a good year for stocks in 2024.
But as we’ll discuss below, recent market moves also suggest some parts of the technology sector are starting to look just a little overbought now—especially one 6.2%-yielding tech-focused closed-end fund (CEF).
I know that’s a lot to lead off with, so let’s break it down.
A week and a half before Christmas, and before last year’s Santa Claus rally, I wrote that we didn’t want a Santa Claus rally to end ’23. That’s because these year-end market bounces have historically led to the following year to be weaker for the markets. Nonetheless, stocks gapped higher as the calendar flipped to 2024:
Stocks End 2023 With a Bang…
That was a nice ride, to be sure, and the cheer of the holiday season made me feel like a Grinch, because I was pretty sure this jump would lead to a January hangover. And it did in the days immediately following the arrival of the new year:
… And Start 2024 With a Thud
That drop on its own took a big slice off the Santa Claus rally. And to be sure, starting the year with such a decline could lead one to worry about a recurrence of the irrational pessimism of 2022. In fact, that fear of market-wide pessimism probably exacerbated the slip in the market we saw to start 2024.
But then stocks jumped again at the start of this week, erasing their New Year’s decline, rendering the S&P 500 effectively flat as of this writing, but still volatile.
So where does all this to-ing and fro-ing leave us?
I see it as a bit of a relief from the overdone jump over the holidays, as it suggests a more rational approach to markets this year. It also encourages us to take just a bit of caution on the tech side of things, as I mentioned a second ago. Let’s talk about that now.
All Eyes on the Fed (Again!)
Let’s rewind to Monday, when tech stocks jumped, sending the tech benchmark Technology Select Sector SPDR ETF (XLK) up 2.5%, outperforming both the NASDAQ and the S&P 500.
No, there wasn’t another ChatGPT-like wonder-product released; the move was prompted by the Federal Reserve, which has clearly signaled that it will, in fact, cut interest rates this year.
The last time the Fed moved toward rate cuts, in 2019, after slowly and consistently raising rates since late 2015, we saw the same pattern of XLK (in orange below) beating the NASDAQ benchmark (in blue) and the S&P 500 (in purple).
Stocks Cheer Easier Money
Of course, COVID lockdowns helped fuel tech in that period, as the sector became critical to keeping all of us connected—and keeping the economy humming. But the Fed’s rate cuts undoubtedly fueled this rate-sensitive sector to that strong outperformance, too.
Now that the Fed has signaled 2024 may be more like 2019 than 2022, those investors who have remained on the sidelines following the 2022 decline (and lost out on the NASDAQ’s 53% return in 2023) are keen to come back into the market.
That, as I mentioned, has led some tech stocks and funds into overbought territory, with a CEF called the Columbia Seligman Premium Technology Growth Fund (STK) topping the list.
STK is a tech CEF we always keep a close eye on, as it allows us to reap a high 6.2% dividend from its portfolio of blue chip tech stocks, including Apple (AAPL), Microsoft (MSFT), Broadcom (AVGO) and Alphabet (GOOGL).
The fund also boasts a stellar history, with a 520% total return since its inception 15 years ago. That track record, its portfolio of blue-chip techs and the big bounce tech saw in 2023 have kept the fund trading at a premium to net asset value (NAV or the value of the stocks it holds) for more than a year and a half.
Right now, its 6% premium—meaning investors are paying $1.06 for every dollar of STK’s assets—is well north of the 3.9% premium it’s boasted in the last five years.
That premium also makes STK the most expensive tech-focused CEF on the market, far ahead of other tech-CEF cornerstones like the BlackRock Science and Technology Trust (BST), which trades around par as I write this, the BlackRock Science and Technology Term Trust (BSTZ), with a 19% discount, and the AllianzGI Artificial Intelligence & Technology Opportunities Fund (AIO), at a 12% discount.
Note, too, that all of these funds yield more than STK, with BST paying 8.8%, BSTZ at 7.3% and AIO yielding 10.1%
Due to those discounts and dividends, I wouldn’t label premium-priced STK a top buy now—we always aim for a discount with CEFs—even though STK closed out 2023 strongly and topped off the year by paying a 26.7-cent special dividend, bumping its annualized yield up a bit, to 7.1%.
That investor-friendly approach is why we keep a close watch on STK—and consider it a pick-up when it trades at a discount, or at least below its five-year average premium.
My 4 Top CEFs to Buy for 2024: 9.9% Dividends, BIG Discounts Ahead
We insist on big CEF discounts because they keep us from having to worry about what the market is going to throw at us in the months ahead.
After all, if you buy a CEF that’s deep in the bargain bin it’s much harder for it to get cheaper than it is for, say, an overpriced tech stock.
Which is why I’m urging investors to buy the top 4 CEFs I’m recommending today. They sport ridiculous discounts of 10%+ and yield 9.9% on average. PLUS they pay dividends monthly, too!
I’m actually calling for 20%+ price upside from these 4 unloved dividend plays this year. But even if markets do take a tumble, their discounts will help insulate them. And we’ll still collect their 9.9% average yields!