Today, the 10-year Treasury pays just 2.4%. Put a million bucks in T-Bills and you’re banking $24,000 per year. Barely above poverty levels!

Hence the appeal of closed-end funds (CEFs), which often pay 8% or better. That’s the difference between a paltry minimum-wage income of $24,000 on a million saved or a respectable $80,000 annually.

And if you’re smart about your CEF purchases, you can even buy these funds at discounts and snare some price upside to boot!

The market’s fast run-up since January 1 has made cheap CEFs just a bit harder to find. And some CEFs have become so pricey that, if you hold them, you should consider selling before their premiums fall to earth.

(We recently spotlighted one CEF paying a too-good-to-be true 13.7% dividend. Unfortunately its ridiculous double-digit premium is about to evaporate! You can learn more about this one here.)

Perfect Time for a CEF “Brush-Up”

So, with the markets in flux, now is a great time to take a run through my “golden rules” of successful CEF investing.

Picking CEFs is a bit more nuanced than researching regular stocks, because we’re analyzing managers, strategies and holdings versus simple businesses models. After all, for lazy investors, it’s easier to count on dividends from a tired Dividend Aristocrat like Coca-Cola (KO) than it is to determine how much China exposure the Aberdeen Asia-Pacific Income Fund (FAX) has!

(The answer? Only about 5%. But that bit of extra bit of research will lead you to a secure 9.9% yield, versus a fallible 3.5% for Coke and its lineup of yesterday’s sugar-packed soft drinks!)

CEF Rule #1: Make Sure All Charts Include Dividends

The Gabelli Equity Trust (GAB) has been a great performer in the last decade—but going by its price chart, it looks like it’s been run over by the “dumb” SPDR S&P 500 ETF (SPY), which blindly tracks the market:

Looks Like a Laggard …

… Until You Add the Payouts Back!

Make sure the chart you’re reading includes dividends paid (so that it reflects total returns).

CEF Rule #2: Past Performance Matters

A fund’s history can tip you off to the quality of the management team and its strategy. GAB has one of the smartest stock pickers on the planet in Mario Gabelli, who drove it to that monster 556% return, with most of that in the form of cash payouts.

Meanwhile, the Aberdeen Total Dynamic Dividend Fund (AOD) has delivered the worst of all worlds. It crashed harder than the broader markets in 2008, then provided almost no rebound as stocks themselves bounced back.

Dynamic dividends? Not here!

Price Collapse Wipes Out AOD’s 8.3% Payout

Don’t be fooled by the siren song of its fat 8.4% current yield—it’s not going to do you much good when the fund’s share price drops out from under you.

Which brings me to our next point…

CEF Rule #3: A 1-Click Dividend “Health Check”

Some funds pay big distributions that look great, but they’re not sustainable. However they continue to attract new (sucker) investors because they are able to fund their payouts.

Too bad they’re doing it by eating into their net asset values (NAV, or the market value of their underlying portfolios)!

So you’ll want to pay close attention to NAV when you’re picking CEFs. Here are two funds whose underlying portfolios have grinded sideways (or worse) over the past three years:

2 More Big Yields Built on Flimsy Foundations

As you can see, the BlackRock Energy and Resources Trust (BGR) and the Wells Fargo Global Dividend Opportunity Fund (EOD) and have seen terrible NAV performance in the last three years.

So even though both offer outsized dividends of 7.8% and 11.7% respectively, that hardly matters! Because both funds’ weak NAVs kneecapped their total returns (with dividends included). You would have been way better off just buying SPY and being done with it!

Weak Portfolio, Weak Return

The bottom line? Always check out a fund’s NAV performance, in addition to its market-price return and dividend history, before clicking “buy.”

CEF Rule #4: Learn the 3 Ways a Fund Can Make Money

A closed-end fund can pay you from some combination of:

1. Investment income,
2. Capital gains, and/or
3. Return of capital.

Of the three, investment income is preferable because it’s usually the most reliable. Many CEFs pay monthly distributions, so it’s best if they match up their payouts with steady income streams themselves.

Capital gains from rising bond or stock prices can further boost distributions. But they are at risk of disappearing if the markets turn unfavorably.

Finally, everyone assumes return of capital is bad, because it’s simply shipping your money back to you. But as we’ve written previously, it’s often good for investors.

What’s more, if the fund trades at a sizeable discount, this can actually be a savvy way to kickstart the closing of a discount window. More on this shortly.

CEF Rule #5: Keep Fees in Perspective

Most investors are conditioned by their experience with ETFs to search out the lowest fees. This makes sense for investment vehicles that are roughly going to perform in-line with the broader market. Lowering your costs minimizes drag.

Closed-ends are different, though. On the whole, there are many more dogs than gems. It’s an absolute necessity to find a great manager with a solid track record. Great managers tend to be expensive, of course, but they’re worth it.

The stated yields you see quoted, by the way, are always net of fees. Your account will never be debited for the fees from any fund you own. They are simply paid by the fund itself from its NAV.

CEF Rule #6: Never Pay Retail

One aspect of the CEF structure lends itself perfectly to contrary-minded investing: fixed pools of shares.

Mutual funds issue more shares whenever they want. But CEFs have a fixed share count, with their funds trading like stocks. As a result, from time to time a fund will fall out of favor and find its shares trading at a discount to its NAV.

This is basically free money because these underlying assets are constantly marked to market. If a fund trades at a 10% discount, management could theoretically liquidate the fund and cash out everyone at $1.10 on the dollar. Or it can buy back its own shares to close the discount window (and boost the share price).

You can see this in the Cohen & Steers Quality Income Realty Fund (RQI), which trades at an 8% discount now but has traded at par in the last year, implying some nice upside here:

RQI’s Free-Money Markdown

Source: CEFConnect.com

A discount is a great start, but do make sure the team at the top has a plan to close that window!

CEF Rule #7: Look for Management With “Skin in the Game”

It’s rare to see any fixed income manager put his or her own money on the line at all, unfortunately. According to a recent Barron’s article, nearly half of all closed-end funds have no insider ownership whatsoever.

That raises an obvious question: why would we want to own any of these funds, if the managers don’t want to buy in themselves?

The 3 Best Closed-End Funds to Bankroll Your Retirement

Closed-end funds are a cornerstone of my 8% “no withdrawal” retirement strategy, which lets retirees rely entirely on dividend income and leave their principal 100% intact.

Well that’s not exactly right.

Their principal is more than 100% intact, thanks to price gains fueled by collapsing discounts, like the example I gave you in Rule #6 above! Which means principal is actually 110% intact after year 1, and so on.

To do this, I seek out closed-end funds that:

• Pay 8% or better…
• Have well-funded distributions…
• Trade at meaningful discounts to their NAV…
• And know how to make their shareholders money.

And I talk to management, because online research isn’t enough. I also track insider buying to make sure these guys have real skin in the game.

Today I like three “blue chip” closed-end funds as best income buys. And wait ‘til you see their yields! These “slam dunk” income plays pay 6.1%, 8.6% and even 9.1% dividends.

Plus, they trade at 10 to 15% discounts to NAV, which means they’re perfect for your retirement portfolio because your downside risk is minimal. Even if the market takes a tumble, these top-notch funds will simply trade flat… and we’ll still collect those fat dividends!

If you’re an investor who strives to live off dividends alone, while slowly but safely increasing the value of your nest egg, these are the ideal holdings for you.

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!

Source: Contrarian Outlook

Don’t be fooled: imitating the picks of famous stock pickers is a road to retirement ruin.

I get it: gurus like Warren Buffett, Dan Loeb and Ken Fisher are the cream of the crop.

Too bad the big cash wads these guys toss around limit them to the lamest dividend investments. And you can bet almost all of them are missing out on one stock that’s paying a lucky group of investors an incredible 32% dividend!

Let’s dive straight into why following the pros’ lead is a big mistake. Then I’ll give you three ridiculously cheap stocks to grab for massive dividends—before their prices take off into the stratosphere.

And yes, I’ll unmask that amazing 32% payer along the way, and show you how you can grab a piece of that action yourself.

No Place for Dividend Investors

The first problem with mimicking celebrity hotshots? They’re almost always hunting for quick hits—jumping on a hot sector or stock dialed in for a fast gain. Notice I said gain: the big fish put a stock-price surge at the top of their list.

Dividend cash? An afterthought. Check out the pathetic payouts on the 10 stocks that made up their top holdings in the fourth quarter:

Big Names, Lousy Payouts

Source: MarketWatch.com

Two things jump out here:

1. They’re all tech plays, with the exception of JPM, and …
2. Six pay no dividend at all. The remainder dribble out a pathetic 1.8%, on average.

Buying High, Selling Low

So we can forget about looking to the pros for income. Now let’s look at gains, because here’s something most people don’t know: by the time we get our hands on the hotshots’ latest picks, they’re way out of date.

That’s because no one gets a peek at them till 45 days after the end of the quarter in which they were bought. Those are the rules governing Form 13F, through which institutional investors must report their holdings to the SEC.

This would have been a big problem if you jumped into the top managers’ favorite tech stocks around the middle of February, when the latest 13Fs came out. By then, the tech sector had already booked 75% of its year-to-date gain!

45 Days Late … and Thousands of Dollars Short

But this doesn’t mean we should ditch tech entirely. Truth is, these companies are sitting on some of the world’s biggest cash piles. Those will only grow as they let loose earth-shattering megatrends like artificial intelligence.

And even though tech and finance have soared, both sectors are home to three bargain buys throwing off massive dividends, too (including the 32% payout I mentioned off the top—we’re almost there)!

Let’s jump in.

High-Dividend Play No. 1:  A 7% Payout From … Google!?

Remember that chart of the hedge funds’ most popular stocks I showed you earlier? I’ll save you from scrolling up. Six names on the list are Amazon.com, Microsoft, Apple, Alphabet, Facebook and PayPal.

Now look at the top-10 holdings of a closed-end fund (CEF) called the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX), payer of an outsized 6.9% dividend as I write. They’re all there:

Source: Nuveen.com

If you’re a member of Contrarian Income Report, you might remember QQQX: we held it from January 2017 till April 2018—just 15 months—and rode it to a hefty 42% total return in that time.

Today this fund is a terrific alternative to big-name (but low-paying) tech stocks. To generate that big payout (and smooth out volatility), QQQX sells call options on 35% to 75% of its portfolio.

Here’s the best part: the fund trades at a 0.76% premium to its net asset value (NAV, or the underlying value of its portfolio) today. I don’t normally recommend CEFs priced above NAV, but this premium is a discount in disguise: it’s averaged 4.7% in the past year and has shot as high as 18.1% in that time.

That’s right: investors will pay up to $1.18 for every buck of QQQX’s assets! The upside and income waiting for us here are obvious.

High-Dividend Play No. 2: “Swap Out” JPM for This 8% Dividend

Now we’re going to trade our miserly “regular” finance stocks for another CEF: the Cohen & Steers Limited Duration Preferred & Income Fund (LDP).

LDP owns bank stocks, but not “regular” bank stocks. Instead, it holds banks’ “preferred stocks,” which throw off waymore dividend cash.

So by spending about a minute in your online brokerage account, you can exchange the regular shares of banks like JP Morgan for LDP and start tapping the fund’s 7.8% dividend (paid monthly, no less).

LDP’s 3.6% discount to NAV makes it fourth-cheapest among its 16 preferred-stock-CEF cousins today. That hedges our downside as we enjoy LDP’s massive payout and tees up further gains as the discount swings to par—inevitable, in my view, in the next 12 months.

Now let’s finally talk about …

High-Dividend Play No. 3: Tech’s Hidden 32% Dividend

Now let’s swing back to tech, and my favorite way to squeeze miserly big-caps for big payouts (up to 32%!): buy their landlords. The best way to do that is with a real estate investment trust (REIT) called Digital Realty Trust (DLR).

DLR owns 198 data centers (storehouses of computer gear every company must have) and boasts a client list that’s a who’s-who of tech. Heck, even JPM shows up here, so you’re getting a slice of the rent from our gurus’ top finance play, too:

Source: Digital Realty Trust February 2019 investor presentation

You’re probably wondering how a stock with a current yield of 4% could ever give you an outsized 32% in cash every year. To answer that, we need to look at the real story here: dividend growth.

DLR’s dividend skyrocketed 591% since its IPO 14 years ago. In other words, if you’d bought then, you’d be getting an amazing (and safe) 32% yield on your original buy today!

How can I say this dividend is safe?

The first reason is history: unlike many tech and finance stocks, DLR has never cut its payout—and kept right on hiking through the financial crisis:

A Battle-Tested Payout

I expect the chart for the next 14 years to look like the chart for the last 14, so, like the folks who bought in 2004, you’re looking at a massive double-digit payout if you buy now and hang on for the long haul.

That brings me to the second reason I love this payout: it’s backed by strong funds from operations (FFO; the go-to cash-flow metric for REITs), with core FFO jumping 7.5% in the fourth quarter. Add in the fact that the payout eats up a modest (for a REIT) 65% of FFO and you get a recipe for more hikes.

The kicker? DLR is cheap, trading at 17.4-times FFO! Don’t wait to grab this one.

Source: Contrarian Outlook

Let’s face it: this frothy market has made it much tougher to uncover the big, cheap dividends you need to fill out your retirement portfolio. So today we’re going to fight back with my top 2 “off-the-record” strategies for honing in on 7.4%+ dividends that still have a lot of upside ahead.

First, to get a sense of the vice the rebound has locked income investors in, check out this chart:

Stock Bounce Crushes Yields

That amounts to an 18% bounce since Christmas Eve, which has sliced 15% off the S&P 500’s dividend yield (because yields fall as prices rise). As I write, the average S&P 500 name dribbles out a 1.9% payout—less than inflation!

Which brings me to the first strategy I’ll show you today.

Contrarian Tip No. 1: When They Go Short, We Go Long

Short interest is one of my favorite ways to “time” stock buys.

If you’re unfamiliar, short selling involves selling a stock you’ve borrowed, with a commitment to buy it back later, hopefully at a lower price. Your profit lies in the difference between the selling price and the price at which you have to buy it back.

It’s a dangerous path that can expose you to unlimited losses (because there’s no limit on how high a stock can rise, while your “regular” buys can only go to zero).

But don’t worry—we’re not going to “short” stocks ourselves. Instead, we’re going to sit back and cash in on the short sellers’ greed.

Here’s how: if a stock attracts a lot of short interest and the price moves up, the “shorts” will scramble to buy and cover their positions. That’s great for us because it can create a “feedback loop” where the rising price triggers short covering, driving the price higher, triggering more short covering, and so on.

All we have to do is relax, let the chaos unfold, and watch our stock rocket higher! And these “squeezes” can be truly epic, like the one that caused Volkswagen to explode 82% in a single day in 2008.

So how do we find our own Volkswagen (and better yet, one with a 7%+ dividend)?

A good rule is that short sellers tend to be the most wrong at the extremes, so we’ll look for short interest that’s wayhigher than usual, then jump in. You can see this in action with Omega Healthcare Investors (OHI), a real estate investment trust (REIT) I’ve recommended in my Contrarian Income Report service:

Short Covering Sends OHI Ripping Higher

Notice how rising short interest kept a lid on OHI’s price, until it peaked in January 2018? If you’d jumped in then, you would have bagged a 35% price gain in just over a year, as short covering helped pry the stock higher.

And that’s just in price gains! Never mind that OHI pays a 7.4% dividend now (and would have paid nearly 10% when short interest peaked). Throw the payout in, and your gain jumps to 48% in just one year.

So much for the common “wisdom” that you can’t get big gains and big dividends from a single stock!

Now let’s move on to our next contrarian buy signal.

Contrarian Tip No. 2: Check In as Analysts Check Out

You can catch another big windfall by paying close attention to analyst ratings—but not the way most people think.

Remember, everyone loves to follow the herd, and analysts are often the lead lemmings. That’s why, when most folks research a stock, they look for those with a lot of buy ratings from Wall Street—if they look at these ratings at all.

But they’ve got it backwards! Because if every analyst already has a buy rating on a company, there’s no hope of upgrades, which can send shares stair-stepping higher.

That’s what happened with self-storage REIT CubeSmart (CUBE), payer of a 4.2% dividend that’s skyrocketed in the last five years. As you can see below, CUBE’s shares nearly doubled from June 2014 to March 2016, as the number of analysts recommending it also nearly doubled, from four to seven.

Wall Street Optimism Drives an Easy Double …

Fast-forward to today, and just one analyst has a “buy” on CUBE, even though the Federal Reserve has halted further rate hikes, a big plus for the entire REIT sector. That sets the stock up for another strong run as analysts climb back aboard.

21 Cash-Spinning Buys for 7.5% Payouts and BIG Gains

Here’s the roadblock most regular folks slam into with “second level” indicators like these: the big brokerages keep ALL of this powerful research to themselves!

Free services, like Yahoo Finance, give us crumbs, with buy recommendations limited to just the last four months. Basing a buy decision on that tiny slice of data could send you straight off a cliff.

Don’t Buy ANY Stock Based on This!

Source: Yahoo! Finance

Finding short interest is even harder. Your only real option here is a paid service like Ycharts, but that will set you back hundreds of dollars a year!

Source: Contrarian Outlook

Stock-market selloffs provide great times to buy big dividends. The stock market was a relentlessly receding tide in the fourth quarter, which is bad for “buy and hope” investors but quite helpful for income specialists like us.

Let’s consider high-quality real estate investment trust W.P. Carey (WPC). This REIT looks good at most prices, but the market gave us an exaggerated dip in December-early January that spiked its yield to nearly 6.5%. Savvy, patient investors who bought on this dip (like my Contrarian Income Report subscribers) didn’t just enjoy an excellent yield on the higher end of its five-year range – they also are sitting on 17% gains in just a matter of weeks!

W.P. Carey (WPC): Why It Pays to Wait for Dividend Deals

The problem for bargain hunters right now is that the market’s red-hot 2019 recovery has brought many stocks back to the bloated valuations they traded at before the fourth quarter provided a little valuation relief.

In fact, we’re still in the midst of one of the most expensive markets ever.

If You’re Buying Stocks Right Now, You’re Probably Overpaying

Source: Multpl.com

But there are a few deep values left in this marked-up market. A few stocks I’ve been monitoring have been pared by between 25% and 65% in less than a year. And as a result, these battered dividend plays, which typically yield 3%-4%, are dishing out yields between 5.3% and 6.6%!

That’s good. Plus these deep discounts also mean there’s potential for short-term pops of 20% or more.

Of course each of these firms has business hurdles to overcome. Let’s dig in to dividend stock bargain bin:

Weyerhaeuser (WY)
Dividend Yield: 5.3%

REITs have held up pretty well over the past half-year or so, which makes timber real estate play Weyerhaeuser’s (WY) performance since July stick out like a sore, black-and-blue thumb.

Weyerhaeuser (WY) Has Been Taken to the Woodshed

The primary tailwind on Weyerhaeuser? The Fed.

In short, the Federal Reserve’s ramping up of interest rates finally started to weigh on the housing market in a big way, which in turn finally popped a bubble in lumber prices that had been keeping WY aloft.

Source: MacroTrends.net

There are a few things to like about Weyerhaeuser. Timber is a very niche REIT realm, providing some serious diversification, and the company has been a beacon of dividend growth, upping its annual payout every year since converting into a real estate investment trust in 2010. And prior to its lumber-related plunge last year, it had outperformed the Vanguard REIT ETF (VNQ) by 135% to 86% on a total return basis over the past decade.

But is WY a value?

While lumber prices appear to be stabilizing, they’re still doing so at levels considerably lower than their 2018 highs. Moreover slower rate hikes from the Federal Reserve will take a little pressure off the housing market. But the data is still grim. November housing starts (the last available data thanks to the temporary government shutdown) showed single-family starts at a 1 ½-year low. Third-party gauges for December activity, namely permits, also were in a downtrend.

The dividend is a potential problem, though. Weyerhaeuser did improve the payout again last year, in August, by 6.3%. But the company paid out $995 million in dividends against $748 million in profits last year, and its projected annual payout of $1.36 per share in 2019 is far more than analysts’ expectations for 83 cents in profits.

This could be a short-term bump in the road, but the path out isn’t clear yet. That, combined with the dividend situation, makes WY look less like a value, and more like a high-yield value trap.

Tailored Brands (TLRD)
Dividend Yield: 5.6%

Tailored Brands (TLRD) isn’t a familiar name outside the investing space, but most people will know its two primary brands: Men’s Wearhouse and Jos. A. Bank. The men’s suit stores engaged in a nasty bout of M&A maneuvering starting in October 2013 before eventually completing a merger in June 2014. Men’s Wearhouse switched to a holding-company structure in January 2016, adopting the Tailored Brands moniker in 2016.

Shares have been bludgeoned over the past year, losing roughly two-thirds of their value since May 2018. Some of the biggest hits included disappointing same-store sales growth in June, a report in December that Men’s Wearhouse traffic was sliding (thanks to several factors, including increased competition from the likes of Bonobos) and another report in January in which the company lowered its fourth-quarter guidance on weakness at Jos. A. Bank.

What’s to like about this apparent train wreck?

For one, the yield on TLRD is now well north of 5%, which is on the very high end of its range since the merger. But despite the company’s woes, it will pay out just 32% of its expected full-year earnings ($2.28 per share) in dividends. In short, the payout is extremely safe for a company that has been trounced so hard.

Another Yield Spike for Tailored Brands (TLRD)

At the same time, TLRD is making strides on paying out its debt. The stock also is a deep value at these levels, trading at just five times future earnings estimates. And despite its woes, analysts still see the Tailored Brands averaging high-single-digit profit growth over the next half-decade.

But cheap stocks can get even cheaper.

Tailored Brands warned significantly on comps, but said it wasn’t sure why they had weakened so much. They’re so much of an outlier compared to past quarters, in fact, that this could just be a blip on the radar. If so, TLRD could be a dividend-and-value double play. But if this is a glimpse into a shift in consumer tastes, Tailored Brands will be forced between a rock (falling sales) and a hard place (returning to deep discounts, slicing margins).

Altria (MO)
Dividend Yield: 6.6%

I’ve warned about the long-term difficulties facing cigarette maker Altria (MO) for some time – namely, that the U.S. is in a never-ending crackdown on cigarettes, threatening the company’s core business. Shares have indeed been caught in a downward trend since 2017, but reality really started to catch up with Altria in Q4 2018, as shares plunged far deeper than the broader market. Now MO sits about 15% lower than where it was the last time I cautioned my readers on the stock.

But maybe, just maybe, there’s a contrarian play here?

Wells Fargo seems to think so. Analyst Bonnie Herzog, who rates the stock “Outperform” and has a $65 price target that implies 33% upside from here, doesn’t see any end to Altria’s decline in cigarette sales. But she does think vaping might be the company’s savior, pointing to the company’s $13 billion, 35% stake in e-cigarette maker Juul, announced in December. The money quote:

“One of the key points that continues to be misunderstood, in our view, is that while MO’s cigarette volumes will likely decelerate faster…, the incrementality from MO’s stake in JUUL — strong U.S. share/margin growth and huge upside internationally — is underestimated since we predict MO’s equity income from JUUL will more than offset MO’s shrinking cigarette volume pool.”

And like Tailored Brands, Altria is at least showing big value-and-income numbers. Its yield has plumped up to north of 6%, and its forward P/E of 11 is well, well below the market average.

Altria’s (MO) Yield Hasn’t Been This High Since the Turn of the Decade

Credit where credit is due: Altria isn’t sitting around praying that cigarette sales will magically recover. The investment in Juul was a pricey risk, but one the company needs to take if it wants to stave away irrelevance as its core product deteriorates into a pile of legislative ash.

That said, Juul isn’t immune from the same pressures. The company faces class-action lawsuits in Philadelphia and New York federal courts over the company’s marketing tactics and over its disclosure of nicotine levels. Juul also temporarily halted sales of most of its flavored nicotine pods in November in hopes of getting out in front of aggressive federal regulators worried about spiking e-cigarette use.

If this sounds familiar, it should. This is the same treatment cigarettes have gotten for years … and why Altria still could be in trouble long-term despite its creative wheeling and dealing.

Live Off Dividends Forever With This “Ultimate” Retirement Portfolio

If you’re mapping out a successful retirement portfolio, these three stocks illustrate the right idea: high yields with price potential. We all know you need enough income to cover all of your regular expenses, but investors often overlook the importance of growing their nest egg in retirement – that way, if the unexpected happens, you won’t cripple your dividend-producing potential to dig out of trouble.

But you also need security – and you can’t do that by taking flyers out on deeply troubled stocks like the three picks I just covered.

Source: Contrarian Outlook

Brett Owens, Chief Investment Strategist
Updated: February 20, 2019

It’s a question I get from investors all the time: “Should I take my dividends in cash or reinvest them through a dividend reinvestment plan (DRIP)?”

My answer: unless you want your cash sitting in your account earning zero, your best bet is to reinvest any dividend money you don’t need to pay your bills.

But we don’t want to practice “buy and hope” investing, either, whether we do it through obsolete DRIPs or the old-fashioned way.

When I say “buy and hope,” I mean putting your cash into household names like the so-called Dividend Aristocrats and “hoping” for higher stock prices when you cash out in retirement.

You’ve probably heard of the 57 stocks on the Aristocrats list, which have raised their payouts for at least 25 straight years. Trouble is, despite their lofty name, these companies hand us a pathetic current dividend of 2.2%, on average. And quite a few pay less than that:

5 Dividend Paupers

So if you invest mainly in the average Dividend Aristocrat (as many people do), you won’t have to worry about reinvesting your dividends. You’ll need every penny of dividend income just to keep the lights on!

That’s because even with a $1-million portfolio, you’re only getting $22,000 in dividend income a year here, on average. That’s not far above poverty-level income for a two-person household.

Pretty sad after a lifetime of saving and investing.

Luckily, there’s a way we can rake in way more dividend cash. I’m talking a steady $75,000 a year in income on a million bucks. And if you’re not a millionaire, don’t worry: a $550k nest egg will bring in $41,200 annually, enough for many folks to retire on.

That’s nearly double the income on our million-dollar Aristocrat portfolio, from a nest egg that’s a little over half the size!

How to Bank an Extra $41,200 in Cash Every Year

I know what you’re thinking: “Brett, that amounts to a 7.5% yield. There’s no way a payout like that can be safe.”

You can be forgiven for thinking that, because you hear it everywhere. But the truth is, there are plenty of safe payers throwing off at least that much, like the 21 stocks and funds in my Contrarian Income Report service’s portfolio (which I’ll show you when you click here).

Right now, these 21 sturdy investments yield 7.5%, on average. And every month I personally run each one through a rigorous dividend-safety check, starting with three things that are absolutely critical:

1. Rising free cash flow (FCF)—unlike net income, which is an accounting measure that can be manipulated, FCF is a snapshot of how much cash a company is making once it’s paid the cost of maintaining and growing its business;
2. A payout ratio of 50% or less. The payout ratio is the percentage of FCF that went out the door as dividends in the last 12 months. Real estate investment trusts (REITs) use a different measure called funds from operations (FFO) and can handle higher payout ratios, sometimes up to 90%;
3. A healthy balance sheet, with ample cash on hand and reasonable debt.

Making DRIPs Obsolete

The best part is, these 21 investments are perfect for dividend reinvestment because each one gives us a dead-giveaway signal of when it’s time to buy, sit tight—or sell and look elsewhere for upside to go with our 7.5%+ income stream.

That makes DRIPs obsolete!

Because why would we mindlessly roll our dividend cash into a particular stock every quarter when, at a glance, we can pinpoint exactly where to strike for the biggest upside?

To show you what I mean, consider closed-end funds (CEFs), an overlooked corner of the market where dividends of 7.5% and up are common. We hold 11 CEFs in our Contrarian Income Reportportfolio, mainly larger issues with market caps of $1 billion or higher.

We don’t have to get into the weeds, but CEFs give off a crystal-clear signal that a big price rise is coming. You’ll find it in the discount to NAV, which is the percentage by which the fund’s market price trails the market value of all the assets in its portfolio.

This number is easy to spot and available on pretty well any fund screener.

This makes our plan simple: wait for the discount to sink below its normal level and make your move. Then keep rolling your dividend cash into that fund until its discount reverts to “normal.”

That’s exactly what we did with the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX)back in January 2017—and the results were breathtaking.

How We Bagged a 40% Total Return (With a 7.5% Yield) in 15 Months

QQQX’s management team cherry picks the best stocks on the NASDAQ, juices their high yields with a low-risk options strategy, then dishes distributions out to shareholders. Back on January 6, 2017, QQQX was trading at a 6% discount to NAV and paid a 7.5% dividend.

That triggered our initial move into the fund. And over the next 15 months, we bagged two dividend increases and watched as QQQX’s discount swung to a massive premium—so much so that by the end of that period, the herd was ready to ante up $1.13 for every buck of assets in QQQX’s portfolio!

Discount Window Slams Shut…

That huge swing from a discount to a premium catapulted us to a fat 40% gain (including dividends). But the fund’s outrageous premium meant its upside was pretty well maxed out by the time we took our money off the table on April 6, 2018.

… and Delivers a Fast 40% Gain

And what’s happened since?

QQQX has plunged 6% (including dividends!), far underperforming the market’s 7.8% total return.

Premium Gives Us the Perfect Exit

Forget QQQX: Grab These 8% Monthly Dividends Instead

Here’s the punchline on QQQX: despite the loss it’s posted since last spring, it still trades at a 2% premium to NAV!

Why the heck would we overpay when the ridiculously inefficient CEF market is throwing us bargain after bargain as I write this?

There’s one more thing I have to tell you: many of these cheap CEFs pay dividends monthly instead of quarterly. So if you hold them in your retirement portfolio, their massive dividend payouts will roll in on exactly the same schedule as your monthly bills!

Convenience isn’t the only reason to love monthly payers, though. Because they also let you reinvest your payouts faster, amplifying your gains (and income stream) as you do.

I’m talking about an automatic “set-it-and-forget-it” CASH machine here!

The best news? You can kick-start your monthly income stream without doing a single moment of legwork … because I’ve done it all for you.

Source: Contrarian Outlook

Think you can’t retire on anything less than a million bucks?

Many people would answer that question with a “yes.” If you’re one of them, I have great news: the “million-dollar myth” is just that, a myth.

I’ll tell you why in a second. Then I’ll reveal 4 buys throwing off a safe cash dividend yielding 8.5%—letting you fund your golden years on a lot less.

(These 4 are the tip of the iceberg, by the way. At the very end of this article, I’ll give you 20 more retirement lifesavers paying gaudy 8% average dividends, as well!)

A Million-Dollar Retirement … on $470K!?

So how much smaller of a nest egg am I talking about here?

How does $470K sound? If you’re keeping track at home, that’s 53% less than the suits say you need if you want to spend your golden years above the poverty line.

Better yet, our 4-buy “instant” retirement portfolio will pay us in equal amounts every month. It’s just like getting a regular paycheck, but you don’t have to do a thing—besides log into your brokerage account and pick up your cash!

Beyond the Big Names

A big reason why the million-dollar myth exists is that most folks predict their future income stream based on the pathetic yields popular stocks, like the so-called Dividend Aristocrats, dribble out today.

And it is true that traditional dividend plays don’t come close to the 8.5% average payout thrown off by the 4 off-the-radar buys I’ll show you in a moment.

Let’s take a 4-pack of typical Dividend Aristocrats and map how much they’ll pay investors (based on that $470K nest egg I mentioned earlier) in the next few months.

4 Clicks to Smooth, Safe Monthly Payouts

The best part is that this strategy isn’t capped at $470,000. If you have managed to save a million bucks, you can buy more monthly payers like these and kick your monthly income to $7,083.

So let’s move on to the 4 stocks I have for you now—well, they’re not stocks, exactly, but closed-end funds (CEFs).

CEFs are muscular income plays that give us two advantages: outsized dividends (CEF payouts of 8%+ are common) and big discounts to net asset value (NAV), a powerful upside predictor far too few people watch.

Your Monthly “4-Pack” for an 8.5% Average Dividend

The Western Asset Emerging Markets Debt Fund (EMD) yields a gaudy 9.1% today and trades at a 13.1% discount to NAV as I write.

In English: we’re getting its portfolio of emerging market corporate and government bonds for 87 cents on the dollar!

The upshot here is that plateauing US interest rates (traders betting through the futures markets have the Federal Reserve pegged for zero hikes this year) will send income seekers abroad for higher yields—and that’s great news for EMD.

Either way, management has shown its chops since the current rate-hike cycle started three years ago, with the fund’s price (in orange below) slipping just 2.3%. But add in that monster dividend and its total return jumps to 26%!

EMD Shrugs Off Rate Woes

And EMD pulled this off in a tough time for emerging-market debt! But now, with US rates on hold and EMD’s absurd discount, the fund is poised to deliver some nice price upside, on top of its 9.1% monthly dividend.

Now let’s come back home to another sector primed for gains thanks to slowing rate hikes: US real estate. We’ll ride that trend with the Cohen & Steers Total Return Realty Fund (RQI), and its 8.5% monthly dividend.

US real estate underperformed last year, due to the same rate-hike fears that hobbled emerging-market debt:

Rate Fears Hogtie REITs

But I sensed that the Fed was about to change tack during last fall’s stock-market meltdown, which is why I pounded the table on RQI on December 28. Since then, the CEF (in red below) has dominated the benchmark Vanguard Real Estate ETF (VNQ), in blue, and the SPDR S&P 500 ETF (SPY), in orange.

Not Too Late to Grab This Winner

Sure, that rise has thinned RQI’s discount, but you’re still getting an 8.5% payout here, and the current discount (8.7%) points to more upside: just under a year ago, RQI traded at just 1% below NAV. A rise to that level (a certainty, in my view) would give us a 6% price gain while we pocket that huge payout.

Moving along, let’s add some top-quality finance names through another CEF from Cohen & Steers: the Cohen & Steers Limited Duration Preferred & Income Fund (LDP).

As the name suggests, LDP bypasses finance companies’ regular shares in favor of their preferred stock.

Think of preferreds as stock/bond hybrids that can trade on an exchange, like stocks, but do so around a par value and dole out a fixed regular payment, like bonds.

Their biggest appeal? Outsized payouts. And you can boost those dividends even more if you buy through a CEF like LDP, which pays an outsized 8.3% now.

Another great thing about CEFs in general (and LDP in particular) is that CEF investors tend to be slow to respond to investor mood swings, which is why we can grab LDP at 5.4% below NAV—but your shot at buying cheap is evaporating!

LDP’s Buy Window Is Closing

Finally, let’s tap the Tortoise Power & Energy Infrastructure Fund (TPZ) for its 8.1% payout, while we can still do so at a 7.8% discount.

TPZ holds stocks and bonds issued by oil and gas pipelines, storage and processing firms—mostly master limited partnerships (MLPs)—plus some utility stocks:

Source: Tortoise Advisors

Most MLPs will kick you a K-1 tax form around your return deadline and annoy you and your accountant. But TPZ gets around this by issuing you one neat 1099.

Since MLPs pipe energy, they tend to trade with oil prices. But TPZ’s management has done a great job of dampening oil’s drop since the fund’s inception in 2009.

Below we can see that TPZ’s market price (orange) has dipped 8.1% since launch, but that’s way better than the goo’s 21% crash (in red). And when you add in TPZ’s big dividend, you can see that management has handed investors a solid 81% return in just under a decade.

TPZ Bucks the Oil Plunge

The kicker? The whole time, this dividend has been a picture of serenity:

Oil Crash? What Oil Crash?

Source: CEFConnect.com

Of course, no one knows where oil will go from here, but I expect it to find a bottom in 2019. That means now is the time to make a move—because we could easily look back years from now, at the high yield and nice discount TPZ sports today, and wish we’d pounced.

If you’re like many income investors I hear from, you’re probably worried that 2019 is already shaping up to be a repeat of 2008. The media doesn’t help – the talking heads like to conjure up fear because it draws eyeballs to the TV screen and clicks to Internet articles.

But what if they’re right? In a moment we’ll discuss the safest dividends for a serious pullback.

First, let me calm you down and add that a 2008 rerun is not our most likely scenario. As generals tend to fight the last war, investors tend to fear the last bear market. The next bear is likely to have its own unique “charm” – causes and effects – and we’d like to figure out that flavor ahead of time.

If there’s more to this pullback than we’ve seen, then its affinity for utility stocks is worth noting. The S&P 500 made its recent high on September 20, but don’t tell that to these dividend payers because they’ve shrugged off the broader market’s pullback

This Bear’s Favorite Buy: Utilities?

I’ve been down on the utility sector for two years now and have specifically picked on blue chips Duke Energy (DUK)and Southern Company (SO) repeatedly. I don’t have anything against these firms, but I also don’t recommend buying them when their stocks are pricey and their yields are low, as they are today.

The problem with “dividend desperation” – paying too high a price for too low a yield – is that you end up collecting your payout but losing as much or more in price when the stock’s multiple contracts to its usual levels. And that’s exactly what’s played out with DUK and SO. Their price-to-earnings (P/E) ratios have contracted by 5% and 6% respectively as investors pay less for the same dividend. This has resulted in total returns of… not much:

Our Utility Pans Treaded Water

Is this recent “divergence” between these two large utilities and the broader market a significant tell? Perhaps, but neither stock interests me yet because both are still pricey. Their current P/Es, still around 20, are higher than they’ve been over much of the past decade. And their yields, at 4.3% and 5.4% respectively for DUK and SO, aren’t yet high enough to qualify for our 8% No Withdrawal Portfolio.

Fortunately we don’t have to settle for these pedestrian utility yields or their expensive stock prices. We can run these stocks through my Dividend Conversion Machine to double their yields to 8%, 9% and more – without adding any additional risk!

A Dividend Party Like It’s 2009

Nobody wants a repeat of 2008, but everyone wants another chance at 2009! Unfortunately most investors were too scared then to take advantage of once-in-a-lifetime yields. Our two utilities, for example, were paying their highest levels in years:

Generous Dividend Yields – For a Moment

More dividends for your dollar. Such were the “good times” that income investors could have enjoyed in 2009:

Why am I living in the past and telling you this now? Isn’t this an opportunity resigned to history forever? Fortunately NO – I’ve actually found a secret way for you to “force” blue chip names just like these to pay you massive, 2009-style dividend yields today.

Just Released: How to “Force” a 7.5% Dividend From Duke Energy

I’ve found 4 mysterious “Dividend Conversion Machines” that let you rewind the clock: buy stocks like Duke, but instead of grabbing today’s 4.4% dividend, you’ll get the same incredible 7.5% CASH payout folks who bought in 2009 bagged instead!

But there’s a vital difference: you won’t have to take a stomach-churning plunge to get it, like you would have back then.

Sure, handy slogans like “Buy when there’s blood in the streets” are easy to say. But actually overcoming fear and hitting the buy button at a time like that is almost impossible for most people.

But with these 4 amazing “Dividend Conversion Machines,” you’ll grab the same massive dividend yields the best blue chips were paying in that fleeting moment back in 2009 right now—TODAY.

And these life-changing payouts are safe, backed by these very same household-name stocks.

Massive Upside and 7.5% to 8%+ Dividends—in 1 Buy

What’s more, you can grab these lofty payouts whenever you’re ready: all at once, on an automatic yearly or monthly schedule … or simply whenever you have new money to invest.

It’s all up to you!

Best of all, each of these 4 incredible investments are about to explode and give us massive price upside, too.

How massive?

I’m talking 20%+ yearly price gains, on top of dividends of 8%, 10% and up—without having to buy in the middle of a meltdown, like our 2009 buyers did.

Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!

Source: Contrarian Outlook

Thanks to the December selloff, it’s relatively easy to find 9% yields. The stock market was a relentlessly receding tide in the fourth quarter, which is bad for “buy and hope” investors but quite helpful for income specialists like us.

Let’s look first at real estate investment trusts (REITs). Many now pay 9% – some good, some bad. The main index Vanguard Real Estate ETF (VNQ) has only paid this much (4.9%) twice before in the past ten years:

VNQ Is Rarely This Generous

By cherry picking the lot we can find 49 stocks paying 9% or more. But we should avoid names like Government Properties Income Trust (GOV), which frequently pops up on cute recession-proof dividend lists.

Most of the company’s income comes from government entities, so it seems like a smart way to potentially tap Uncle Sam for rent checks. However, its share price is down 66% in five years. Even with the supposedly generous payout, GOV investors have the taste of stale government cheese in their mouths.

There are a few reasons GOV has been consistently crushed. First, its stated funds from operation (FFO) have been in decline. FFO per share is 24% lower today than it was five years ago.

Second, it’s likely worse, because GOV may be overstating its FFO! The firm has been accused of conveniently excluding maintenance-related capital expenditures. Can you imagine old government buildings that don’t require any maintenance?

Stay away from this sketchy situation.

Moving Beyond the Pure Landlords

When considering the 9% payers, we should look beyond the landlords collecting rent checks. These firms carry the REIT corporate structure so that they can avoid paying taxes! By doing so, they agree to dish most of their dividends to shareholders.

They are often misunderstood, hence their high payouts – and opportunities for us. For example, let’s consider Arbor Realty Trust (ABR), which makes loans for commercial and multifamily properties between $750,000 and $5 million. This is a niche banks don’t serve much these days.

Arbor is masterfully run by Founder and CEO Ivan Kaufman. Both an operator and shareholder, he is able to peer past Wall Street’s quarterly treadmill to made smart long-term decisions. Ivan has been able to find better business opportunities than slum-lording old government properties:

A Tale of Two 9%+ Payers

Contrarian 9%+ Opportunities in CEF-Land, Too

If you’re smart about your CEF (closed-end fund) purchases, you can diversify your portfolio and fortify your dividend stream. You can even buy these vehicles:

1. For 9% yields or higher,
2. And at discounts so that you can snare some price upside to boot!

Here’s why: CEFs (unlike their ETF and mutual fund cousins) have fixed pools of shares. Meanwhile, their prices trade up and down like stocks – which means these funds can sometimes trade at a discount to the value of their underlying assets! You can literally buy a dollar for less.

And even though stocks-at-large are looking quite precarious today, this scary environment has income seekers scared of CEFs. Many of my readers have actually asked me if they should bail on our high-paying vehicles. The financial media drumbeat is in their heads, and they’re concerned that their funds are going to keep dropping in price.

In recent years, the bad rap on bond CEFs is that they couldn’t thrive in a rising rate environment. Now, the Fed is ready to hit “pause” indefinitely (traders are pricing in only a 50/50 chance of any rate hike in 2019). Yet basic investors are selling them in a liquidation panic.

Please, don’t follow this misguided herd. Instead, let’s consider a couple of contrarian ideas with big upside potential.

The Kayne Anderson MLP Investment Fund (KYN) pays an amazing 11% today. It holds a collection of master limited partnership (MLP) stocks. Most MLPs will kick you a K-1 tax form around your return deadline and annoy you and your accountant, but KYN gets around this by issuing you one neat 1099 (which is not nearly as messy).

Plus, when energy is out of favor, you can buy KYN for less than the value of the stocks it holds. Today, its portfolio is selling for just 94 cents on the dollar. That’s about as cheap as you’ll ever see it:

Lose the K-1 Hassle and Bank an 11% Yield (at a Discount)

Since KYN’s holdings pipe energy around, it tends to trade with oil prices. A freefall the goo has sent MLPs spiraling lower. When energy prices eventually find a bottom – probably sometime in 2019 – this will be a compelling yield plus upside play.

Finally, let’s give some turnaround credit to Aberdeen’s Asia-Pacific Income Fund (FAX). I issued a sell recommendation for FAX in May 2018 because its NAV was heading the wrong way. Rising rates were pressuring the value of the fund’s fixed-rate bond portfolio, and those bonds weren’t paying enough for FAX to pay its dividend without price appreciation help.

Fast-forward to October and the financial winds shifted. This has helped FAX’s portfolio, which has actually increased in value as broader markets have unraveled. This shift is not yet reflected in the fund’s price, which has drifted 18% below its NAV!

FAX Trades for 82 Cents on the Dollar

FAX has paid the same $0.035 monthly dividend since 2002, which is now good for a 10.7% yield on its depressed share price. If the fund can continue paying its distribution while grinding its NAV sideways or better, it’s going to be a steal at these levels.

We’re not buying FAX or KYN just yet, however. I’ve got three more high paying plays I like even better right now withgreat growth potential on top of their generous current yields.

The 3 Best Bear Market Buys (with 8%+ Dividends) for 2019

With the recent market insanity you’ve probably thought about dumping – or at least reducing – your stock holdings and focus on fixed-income investments as you near and enter retirement. It sounds like a smart move, but going lean on stocks leaves you open to two big risks:

1. That you’ll outlive your savings, and
2. You’ll miss out on the long-term gains only the stock market can offer.

So why not blend a portfolio of 8%+ bond funds with smart stock picks that provide you with similarly high yields with upside to boot? Sure, they may “sell off” a bit if the markets pull back. But who cares. Like a savvy rich speculator, you’ll be able to step in and buy more shares when they are cheap – without having to worry about your next capital withdrawal.

Let’s take healthcare landlord Omega Healthcare Industries (OHI). The firm’s payout is usually generous, and always reliable – yet, for whatever reason, its sometimes manic price action gives investors heartburn.

But it shouldn’t. It’s actually quite predictable. Check out the chart below, and you’ll notice:

1. When the stock’s yield is high (orange line), its price is low. Investors should buy here.
2. When the stock’s price is high (blue line), its yield is low. Investors should hold here and enjoy their dividend payments.

Investing is Easy: Buy When Yield (Orange Line) is High

Of course this simple timing strategy is much easier to employ if you don’t need stock prices to stay high to retire. Most investors who sell shares for income spend their days staring at every tick of the markets.

You can live better than this, generate more income and even enjoy more upside by employing our contrarian approach to the yield markets. We live off dividends alone. And we buy issues when they are out-of-favor (like right now) so that our payouts and upside are both maximized.Editor's Note: The stock market is way up – and that’s terrible news for us dividend investors. Yields haven’t been this low in decades! But there are still plenty of great opportunities to secure meaningful income if you know where to look. Brett Owens' latest report reveals how you can easily (and safely) rake in 8%+ dividends and never worry about drawing down your capital again. Click here for full details!