{"id":42995,"date":"2023-08-01T08:35:17","date_gmt":"2023-08-01T12:35:17","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/playing-the-feds-recession-pivot-with-10-6-dividends\/"},"modified":"2023-08-01T08:35:19","modified_gmt":"2023-08-01T12:35:19","slug":"playing-the-feds-recession-pivot-with-10-6-dividends","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=42995","title":{"rendered":"Playing The Fed\u2019s Recession \u2018Pivot\u2019 With 10.6% Dividends"},"content":{"rendered":"
\n

It\u2019s no secret that stocks\u2014especially tech stocks\u2014<\/em>have soared this year. And today I\u2019m going to show you a contrarian dividend play I see as the perfect way to take advantage.<\/p>\n

And before you ask, no, we\u2019re not too late here, even though it may look like we are, in light of the NASDAQ\u2019s 40% rise in half a year.<\/p>\n

The key to unlocking tech-driven gains is not<\/em> buying overbought darlings like Meta (META),<\/strong> Alphabet (GOOGL), Apple (AAPL)<\/strong> and Amazon.com (AMZN).<\/strong> Instead we\u2019re buying through a closed-end fund (CEF) yielding an outsized 10.6% and trading at a 15.7% discount to net asset value (NAV, or the value of its underlying portfolio).<\/p>\n

That discount is key: in effect, it\u2019s like buying these tech stocks at 15.8% off\u2014when they were much cheaper than they are now. But I know what you\u2019re likely thinking: isn\u2019t that still too rich, given tech\u2019s big gains this year? What if there\u2019s a market correction?<\/p>\n

Let\u2019s address those worries now, then we\u2019ll talk more about the CEF I want to show you today\u2014and name another<\/em> CEF that holds top tech names but should be avoided.<\/p>\n

Truth is, bubble worries are for real. Take a look at the CNN Fear & Greed indicator, a decent marker of where the mainstream crowd\u2019s heads are at. It\u2019s been at Extreme Greed for months now.<\/p>\n

<\/fbs-ad><\/p>\n

Add to that the one most reliable recession indicators there is\u2014the inverted yield curve (meaning the yield on shorter-term Treasuries rises higher than the yield on longer-term ones). The curve has inverted before all<\/em> recessions in modern American history.<\/p>\n

It\u2019s never had a false positive\u2014and the yield curve, shown below through the relationship between the yield on the 10-year Treasury and the three-month Treasury, has been inverted for months.<\/p>\n

Either we live in unprecedented times, or the market is set for a pullback.<\/p>\n

No one can tell the future, of course. But what I can<\/em> tell you is there\u2019s a strong chance we\u2019re living in weird circumstances and this reliable indicator is wrong.<\/em><\/p>\n

The Pandemic Effect<\/h2>\n

Since 2020, the world has been in a level of disarray we haven\u2019t seen since the Industrial Revolution. Never before has all of humanity effectively agreed to shut down economic activity for an extended period. The effects of that are, of course, unpredictable.<\/p>\n

In mid-2020, no one was worried about inflation because people still weren\u2019t buying many goods and services due to fear of COVID. And when inflation started ticking up in 2021, inflation hawks warned it would get worse and last for years.<\/p>\n

Last year it looked like they were right, so stocks plummeted. Inflation hawks, however, have since been proven wrong, as the chart above shows; now, at 2.97%, inflation is close to the 2% inflation target the Fed always eyes.<\/p>\n

That also means the Fed\u2019s rate hikes are unlikely to go much further. The latest one, which caused rates to reach their highest level in over 20 years, didn\u2019t cause the market much worry, just like all the other hikes this year.<\/p>\n

All of this suggests we\u2019re in bubble territory, but we\u2019re not, for three reasons:<\/p>\n

    \n
  1. Stocks are still below their all-time highs.<\/li>\n
  2. On a five-year compounded annual growth rate basis, stocks have gone up about 9.5%, which is actually less than their 10-year compounded annual growth rate (10%).<\/li>\n
  3. The Federal Reserve no longer expects a recession.<\/li>\n<\/ol>\n

    The first two points make our current market by definition not a bubble. But the Fed no longer seeing a recession is a particularly critical shift.<\/p>\n

    First, this is important because the Fed did<\/em> see one in 2021 and 2022, which was why they aggressively raised rates. With higher rates the Fed can, paradoxically, stop a recession faster than it can if rates are lower. The need to keep raising rates was clear\u2014at least to the Fed, in a kind of \u201cjust in case\u201d way.<\/p>\n

    There\u2019s a lot to criticize Jerome Powell about, but whatever mistakes the Fed made, they\u2019ve learned from. Now their economists, who saw a high probability of recession in the near term just a few months ago, see zero indication of a recession in the near term.<\/p>\n

    That means the Fed\u2019s rate hikes will likely end soon, and expectations will be allowed to go up. And while this could<\/em> end up in a bubble, it will likely take years to get to that level. We are closer to 1994 than 1999 here; if easy money and a tech bubble cause the next tech-stock crash, we likely have a long time before it comes to pass.<\/p>\n

    One Tech Fund to Play This Tech Bounce\u2014and One to Avoid<\/h2>\n

    So what do we do as investors? I would recommend an unconventional approach: buy a CEF called the BlackRock Sciences and Technology Term Trust (BSTZ), <\/strong>and avoid the Columbia Seligman Premium Technology Growth Trust (STK). <\/strong>Both are having strong years, but they\u2019re still underperforming tech as a whole, suggesting additional value here.<\/p>\n

    While both are big yielders, BSTZ\u2019s 10.6% payout dwarfs STK\u2019s 6.1% while also growing <\/em>its dividend. STK, however, has a stagnant payout that hasn\u2019t budged in years.<\/p>\n

    Finally, both are tech funds that have seen renewed interest from income investors who love how they transform ownership in companies like NVIDIA (NVDA) <\/strong>into a steady income stream. But the love hasn\u2019t been equally distributed: STK now trades at a 6.7% premium while BSTZ\u2019s 15.8% discount has stayed stubbornly large for months.<\/p>\n

    With BSTZ out-earning its dividend by double this year, and with the fund\u2019s history of growing payouts, its safe dividend and big returns this year are a compelling package for income investors, so why aren\u2019t they buying in?<\/p>\n

    Because demand for CEFs remains weak, despite their strong performance, as risk-averse income investors wait for confirmation that the Fed won\u2019t keep raising rates. With the Fed no longer seeing a recession, they should now know the Fed likely won\u2019t do that, and the end is very near. It may take a long time for them to figure it out, believe it and act on it.<\/p>\n

    But that\u2019s okay: it just means we have time to beat them to the punch, buy BSTZ, collect its 10.6% income stream and resell it at a premium down the road.<\/p>\n

    Michael Foster is the Lead Research Analyst for <\/em>Contrarian Outlook<\/em>. For more great income ideas, click here for our latest report \u201c<\/em>Indestructible Income: 5 Bargain Funds with Steady 10.4% Dividends.<\/em>\u201d<\/em><\/p>\n

    Disclosure: none<\/em><\/p>\n<\/div>\n

    Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    It\u2019s no secret that stocks\u2014especially tech stocks\u2014have soared this year. And today I\u2019m going to show you a contrarian dividend play I see as the perfect way to take advantage. And before you ask, no, we\u2019re not too late here, even though it may look like we are, in light of the NASDAQ\u2019s 40% rise […]<\/p>\n","protected":false},"author":1,"featured_media":42996,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-42995","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nPlaying The Fed\u2019s Recession \u2018Pivot\u2019 With 10.6% Dividends | iFintechWorld<\/title>\n<meta name=\"description\" content=\"It\u2019s no secret that stocks\u2014especially tech stocks\u2014have soared this year. 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