Ohen I talk to investors these days, I hear three main reasons why they feel unsettled. The three fears are interconnected (and none of them will probably surprise you!): inflation, the Federal Reserve and the war in Ukraine.
But the funny thing is that these factors are all actually to improve the allure of US equities right now, especially if we buy them through our favorite income investments: high-yielding (and often paying monthly) closed-end funds (CEFs).
Let’s take a closer look at each of these fears now, and then talk about a CEF that suits the volatile mood of investors these days. It yields 7%, trades at a particularly attractive 6% discount to net asset value (NAV), and benefits from a unique strategy that dampens its volatility and also boosts its dividend.
The latest figures give a sign of hope on inflation
We all feel the pinch of high prices, especially at the gas station and the grocery store. But there is some hope in the latest numbers:
Source: Wells Fargo Economics
Granted, inflation was high last year at 5.5%, and forecasts call for inflation at 4.2% this year, which, while still high, is down from last year. – and inflation seems to fall further in 2023 and beyond.
There are several reasons for this, but the most important is actually bullish for equities (and by extension equity-focused CEFs): S&P 500 companies have seen their earnings soar, even with supply chain issues. As you can see below, US corporate profits rose 45% in 2021, which was the best number in over a decade and well above the norm.
This suggests that some companies are taking advantage of inflation to raise their prices more than necessary. But more and more people are now saying they are cutting back on discretionary spending in response to rising prices, meaning there’s not much lead left for companies to continue using this strategy. As the old saying goes, “The cure for high prices is high prices”.
This points to lower inflation going forward, with earnings and sales still strong for US companies as supply chain issues ease. It’s a healthier and more balanced situation than what we’re in now, which is all the more reason to buy stocks today (and do so through a CEF which trades at a discount to net worth account, like the one we’ll talk about in a second, gives you two discounts: one due to the discount and the other due to the recent market pullback).
Fed rate hikes may hit a ceiling
Lower inflation would give the Fed reason to ease rate hikes, making its plan to hike rates to 2% by the end of 2022 and 2.75% by the end of 2022 less likely. end of 2023 materializes. History gives us another reason why this forecast is aggressive:
A blast from the past (recent)
If rates hit 2% by the end of this year, they would still be well below where they were in 2018. And while 2.75% is slightly higher than where we peaked in 2019 , it is well below the peak of 2006 (5.25%) or 2000 (6.5%).
This gives us a hint that the 2019 rate is a reasonable place for rates to peak this time around, when the 2000 and 2006 peaks were unsustainable, especially considering today’s higher consumer debt, businesses and governments. The Fed knows this and realizes that it must keep rates relatively low, even if it raises them.
The war shines a light on the value of US stocks
Finally, the big one: the war in Ukraine. This is obviously a huge humanitarian crisis first and foremost, with plenty to worry about for the well-being of the three million (and counting) refugees across Europe, as well as the brave soldiers fighting in the country.
One of the effects of the war on investments is that more and more people around the world are looking for stocks and funds that are not closely tied to the volatile situation in Eastern Europe. And that leads them to US equities, which already have a long history of outperforming their European cousins.
US stocks offer growth and protection against geopolitical risks
It is therefore a good time to buy US stocks, while they are still at attractive prices after the recent sell-off. And we can do it while protecting ourselves against uncertainty (and giving ourselves that double discount I mentioned earlier) with Nuveen S&P 500 Buy-Write Income Fund (BXMX), which yields 7% today and which is cheap too:
A bigger discount appears
So what about that volatility reduction strategy I talked about a second ago? It would be the fact that BXMX sells covered call options – contracts under which it charges investors the right to buy its shares at a higher price in the future. It keeps the fees (called “premiums” in options parlance) it charges investors who buy those options, no matter what. This, in turn, gives the fund a larger portion of its cash return, which helps stabilize its portfolio and supports its 7% dividend.
Finally, because BXMX owns the stocks of the S&P 500, you gain exposure to companies least likely to be affected by geopolitical events, such as Apple (AAPL), Microsoft (MSFT) and Berkshire Hathaway (BRK.A). Add to that the 7% discount and dividend and it’s pretty easy to see why this fund is a good fit for today’s market.
URGENT: My Top 5 Monthly Paying CEFs Just Went On Sale
I just released my Top 5 Monthly Paid CEFs for the next 12 months – and you’ll want to make sure you buy at least a few before their ridiculous discounts are gone.
Together, these 5 CEFs yield 7.9%, and the real story here is their ridiculous discounts, which are so wide they just can’t last. As they disappear they are likely to propel these 5 funds 20% higher on a price basis by this time next year!
And then there are the incomes, on which we can count in the event of a crisis. These payouts roll in every 30 (or 31) days, like clockwork. This contrasts with BXMX above, which pays quarterly, leaving you to wait three long months for your next payment.
With a quick offer of 28% dividends and earnings (plus a smooth-as-glass monthly income stream), you do NOT want to miss this opportunity.
But a word of warning: because these 5 monthly payers are smaller CEFs, we can only invite a few investors to take advantage of this opportunity. Too much and we risk shifting the price leaving some people unable to get a discount, which I think you’ll agree isn’t fair.
So remember to reserve your spot! Click here and I’ll give you all the details on these 5 high discount monthly paying CEFs including their names, tickers, yields, discounts and everything else you need to know.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.