This 6.5% Dividend Loves a Market Meltdown

Today I’m going to give you a strategy—and a strong 6.5%-yielding fund—that both shine when the market throws a tantrum.

And both are way better than what most people do when things get rough: cash in.

Many studies have shown that trying to time the market simply doesn’t work. And even if you did have the superhuman ability to get in and out perfectly, you’d still underperform a buy-and-hold approach. Thanks to compound interest, keeping skin in the game is more important than trying to save your skin.

Options: Your (Surprising) Friend When Markets Roil

Instead of fruitlessly trying to time the market, we’re going to do something that actually works (and takes far less effort!).

We’re going to hedge our stock portfolio with a tool many folks think is dangerous but really isn’t (when used the way we’re going to use it).

I’m talking about options.

Now it is completely true that buying options is akin to gambling. But we’re not going to buy options; we’re going to sell options (call options, specifically). And that changes the game completely.

Best of all, we’re going to sell our call options through a “covered-call fund,” a special type of closed-end fund (CEF)run by professionals who do all the work for us.

(Call options give the holder the right, but not the obligation, to buy a security before a certain date. The buyer pays the seller—in this case our fund—for this right, and that cash stream helps smooth out covered-call funds’ volatility.)

Funds that sell call options against a portfolio of stocks can do better than funds that simply buy and hold in volatile times, while also outperforming in sideways markets. Since stocks have been both volatile and sideways for the last year, this strategy is tailor-made for today.

That brings me to our pick, which both buys high-quality companies at a good price and limits its downside with options.

This Fund Defends Your Nest Egg and Yields 6.5%

Our CEF is one of the largest of its class and one of the most discounted: the BlackRock Enhanced Equity Dividend Trust (BDJ).

This is a 6.5%-yielder trading at an 8.9% discount to NAV, even though its discount was half that just a few months ago. Those two facts are important because they mean BDJ’s managers only need to get a 6% return in the stock market to maintain the fund’s dividend payout, which is easy, since the market averages an 8% annual return over the long haul.

And BDJ has done even better, with a 9.4% annualized return over the last decade.

A Sparkling History

In fact, BDJ’s dividend has remained the same for the last four years—ever since the Fed started raising rates and volatility in stocks increased. That makes sense, considering the fund’s portfolio and strategy.

Large-Cap Safety Through and Through

With a portfolio of large-cap stocks from all sectors and a focus on cash-flow generation, BDJ marries value-investing and covered-call strategies in one easy-to-buy fund.

Plus, those 6.5% dividends are a nice treat.

Yet BDJ isn’t getting much respect—at least not yet. After its discount to NAV widened at the end of 2018, when investors panicked, BDJ is still cheaper than it was a year ago, even though its NAV has pretty much fully recovered:

An Underappreciated Bargain

If volatility comes back, that NAV recovery may slow down a bit, but it should stay on the same trajectory. And if volatility disappears, expect BDJ’s discount to NAV to continue to vanish. That spells out a rare win-win for income investors looking to protect themselves while still getting a reliable income stream.

This 7% Dividend Is Recession-Proof—and Tax-Free, Too

Covered-call funds aren’t the only CEFs that can build some Zen into your portfolio during a market wipeout.

There’s another type of high-yield CEF that does the exact same thing. I’m talking about municipal-bond funds.

I know. Just the name is enough to make your eyes glaze over. But don’t let that put you off, because “muni” funds are perfect for any investor’s portfolio.

That’s because they’re backed by the most reliable consumer there is: the government!

States, counties and cities issue munis to fund badly needed infrastructure, such as roads, bridges, airports and railroads.

That makes them a solid source of income on their own—and you can boost your dividend stream even more if you buy your munis through a CEF, like the one I just recommended in the latest issue of my CEF Insider service.

Check out the steady upward climb my new pick has put on over the past year (in blue below), compared to the motion sickness your typical S&P 500 investor suffered:

Imagine Holding This “Steady Eddie” Fund

And it still has plenty of room to run!

Michael Foster has just uncovered 4 funds that tick off ALL his boxes for the perfect investment: a 7.4% average payout, steady dividend growth and 20%+ price upside. — but that won’t last long! Grab a piece of the action now, before the market comes to its senses. CLICK HERE and he’ll tell you all about his top 4 high-yield picks.

Is This Often-Overlooked Gold Sector About To Take Off?

Do you remember what happened to the price of gold in 2011? It was a banner year for commodities as the US Dollar was down and demand from China was soaring. But perhaps no commodity had a more memorable run that year than gold.

If you remember, central banks around the world were buying gold by the boatload. And the global financial crisis very much sparked fears of holding fiat currencies. Physical assets became highly sought after. On many street corners you could find shops buying gold and silver in any form they could get their hands on.

That was the year the price of gold hit nearly $2,000 per ounce. The funny thing is, gold has mostly remained elevated since then even though the price has dropped quite a bit (not adjusted for inflation).

Since 2013, gold has swung between roughly $1,100 and $1,400 with the median price somewhere around $1,200. But perspective is important, and as recently as 2004, the precious metal was only $400 an ounce! It’s back up to about $1,350 these days with the USD once again potentially heading south.

Gold investors will buy everything from physical gold (like gold coins) to gold ETFs to gold mining companies. Looking at gold miners, their fortunes are clearly tied into the price of gold. For example, VanEck Vectors Gold Miners ETF (GDX) is down from the $60 level in 2012 to about $23.

But it’s been an even tougher road for junior gold miners. These companies are generally more about prospecting and less about maintaining cash flows. In other words, they’re riskier… and it shows.

VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at around $160 in gold’s heyday (2011-2012). Now it’s trading about $32. From a percentage standpoint, junior miners got hammered at far bigger clip than established miners.

Of course, this makes sense. If the price of gold is falling, why take a chance on companies which are risky bets to begin with? Investors are far more likely to take risks with gold trading at $1,800 an ounce.

So are junior miners going to make a comeback now that the price of gold has been climbing? Let’s take a look at the options market for some clues.

Regarding GDXJ, options order sentiment has definitely been positive over the last month. On average, 77% of the options contracts which have traded every day over the last 30 days have been bullish. That’s about as lopsided as you’ll see as far as a 30-day average.

In addition, I recently came across a pretty sizable bullish trade on GDXJ options. With the share price at $32.16, a bullish trader grabbed 1,200 November 35-strike calls for $1.61. That’s a $193,000 bet that GDXJ will be above $36.61 by November expiration.

First off, that one block makes up about 10% of the average daily options volume for GDXJ. Relatively speaking, it’s a huge trade for this stock. Second, even though expiration isn’t until November (5 months away), the position doesn’t even break even until GDXJ climbs 14% higher.

In other words, this is a very bullish trade on junior gold miners. And, it likely suggests that gold is going to keep climbing in the coming weeks and months.

Finally, this is an easy trade to make in your own account if you are bullish on gold in the second half of this year. You only risk the money you spend on the calls, but you have unlimited upside potential should gold and junior gold miners take off.

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Source: Investors Alley