When the Fed Pivots, We’ll Buy This Monthly Dividend Payer

Brett Owens, Chief Investment Strategist
Updated: July 27, 2022

Why would anyone want to pay full price for a stock?

Many common tickers can be bought for 5%, 10% and even 12% off in the closed-end fund (CEF) aisle. These discounted CEFs are the closest thing to a free lunch we have on Wall Street. And most investors don’t know about them because, well, they don’t read enough Contrarian Outlook!

CEFs are unique vehicles. They are one of the last corners of the stock market with a sweet inefficiency. Unlike their mutual fund and ETF cousins, CEFs have fixed pools of shares. Which means they can trade at premiums and discounts to the values of their underlying assets.

That’s right. Deal.

Let’s take Alphabet Inc (GOOG), which is top of mind for many after yesterday’s earnings report. Growth-at-a-reasonable-price (GARP) fans have begun to follow GOOG. Revenues are still climbing by double-digits and the stock fetches less than 20-times earnings and free cash flow… not bad.

Now we do not discuss GOOG here often because it does not pay a dividend. But we can grant GOOG eligibility in these pages by tapping G-D-V instead

That’s the ticker for Gabelli Dividend & Income Trust (GDV), managed by legendary value investor Mario Gabelli. GOOG is a top holding. GOOG in a value fund? I’m old enough to remember when GOOG was a close-your-eyes-and-buy growth name!

Now we have the GARP fans harping on it. But why not go to GDV instead? It’s a way to buy GOOG at an even more reasonable price, because:

  • This is a bear market and GDV has been tossed in the bargain bin. As I write, the fund trades at a 12% discount to its net asset value (NAV).
  • In other words, its investors are buying GOOG and GDV’s other blue-chip value stocks for just 88 cents on the dollar.
  • Plus, GDV pays a nice dividend. It currently dishes 6.2%, paid monthly.

Ah, music to our contrarian and income-demanding ears! GDV also owns American Express (AXP), which trades for 8-times free cash flow and recently raised its dividend a terrific 21%. And Microsoft (MSFT), which has hiked its payout by 59% over the past five years.

GDV is a nifty blend of the stocks we always admire but rarely buy. And hey, if you bought when we called it out here in late 2020, GDV really delivered for you—monthly dividends and beyond.

The “triple threat” for GDV was in effect then. We collected its monthly dividend, enjoyed NAV gains when GOOG, AXP, MSFT and others rallied, and booked price gains too when the discount window narrowed to single-digits.

The secret to our success? When GDV was ready to rally in October 2020, we jumped on it for our Contrarian Income Report portfolio. Then, GDV’s NAV rose, its discount narrowed and we enjoyed 44% gains (including our monthly dividends) in just 15 months!

Monthly Dividend Payer on a Heater

What a wonderful world it would be if GDV could just pay us monthly and tally up 44% returns every 15 months! Unfortunately bull markets don’t last forever. For this reason, we sold GDV in February.

I get that Gabelli is a good stock picker, but it’s impossible to stock pick your way through a bear market like this one. Better to sell early, sit on cash and wait for a better buying opportunity.

Is GDV’s dividend safe? It depends how long this downturn extends for. The fund depends on rising share prices to fund its payout. That’s fine when stocks are going up, but bad when they bust.

It wasn’t worth sticking aside to find out. Thus far, since February, the fund has continued to pay its $0.11 monthly dividend. But its NAV has declined as predicted and, since we flipped it, GDV has shed 12%. Those dividends only cushioned so much…

Why We Don’t Own GDV in Bear Markets

I’d like to revisit GDV again someday. A 12% discount plus a 6.2% monthly dividend is pretty sweet. But we have a couple of hurdles to clear between now and then.

First, we need to see the Federal Reserve tap the brakes. We actually referred to GDV as a “Fed-Fueled Dividend” two years ago. The Fed was printing a boatload of money that was lifting the stock market. GDV was a way to buy cheap stocks that pay a dividend and were likely to sail.

That’s right. On the back of Fed money printing, GDV paid us every month while its share price climbed higher and higher. (Ah, the good old days. Never thought we’d say that about 2020!)

Second, we need to get to the other side of whatever economic slowdown we’re already in. Or at least see light at the end of the recession tunnel.

When we do, CEFs like GDV will be the play. You’ll hear it from me first.

While we wait on GDV, we should instead turn our attention to these monthly dividend payers that are poised to pop. All yield 7% or more per year and trade at sweet discounts to their NAVs today.