Here’s How To Play Overblown China Fears For A 9.5% Dividend

Recent headlines have spurred some readers to write about China — particularly what rising tensions between Beijing and Washington (no thanks to the former’s stuffy spy balloon fiasco) could mean for their portfolios.

First of all, we must always remember that stocks – and in particular my preferred way of holding stocks (via a high yield closed-end fund or CEF) – really are a long term Investment. I know this sounds obvious, but it’s easy to forget when alarming headlines — say, a war or a pandemic — flicker across our screens.

In other words, global chaos is really nothing new for stocks. The difference today is that we are more connected than ever, so every move by one of America’s opponents is all the more emphasized. That’s why stocks have averaged annualized returns of around 8.5% for several decades.

But China’s latest move does Ask yourself, are we better off owning US or international stocks (or funds) these days? So let’s see from which direction the wind is blowing here. Then we’ll talk about a 9.5% yield CEF, which I think is perfect for this market moment.

American or international stocks?

A big question right now is whether the slowdown in globalization we are seeing will spell the end of foreign investment, particularly in China. Will rising tensions add fuel to the fire and encourage Chinese companies to look inward and abandon their global ambitions?

In short, the answer is no. Bloomberg recently cataloged a list of Chinese firms looking to expand internationally thanks to growing collaborations with European partners. For example, you may not have heard of Zhejiang Sanhua Intelligent Controls Co. but they recently raised billions of dollars through a partnership with the SIX Swiss Exchange. And this is one example of many.

So no, international stocks are not off the table for us dividend investors. But before you invest in an international stock or a popular overseas ETF like that Vanguard FTSE All-World Ex-US ETF (VEU)you should take a close look at one crucial indicator: the strength of the US dollar.

We can do that The via an ETF called the Invesco US Dollar Bullish ETF (UUP), which tracks the strength of the dollar, the level of which is a good way to gauge whether foreign stocks are a buy or not. When UUP tops, foreign stocks tend to sell off, which is why anyone who bought VEU when UUP peaked late last year outperformed the Americas-focused funds, although they’re also doing pretty well.

Of course, timing is everything, as holding VEU for the long term means the S&P 500 underperforms by a large margin.

Because we are long-term investors at Contrarian Outlook, we do not attempt to time currency or stock markets. For this reason, I still recommend keeping the majority of your portfolio in proven US stocks with long-term earnings histories. Or better yet, the CEFs they contain.

This CEF gives you a 9.5% yield on America’s best stocks

The Liberty All Star Equity Fund (US) is a good example. It has delivered strong earnings and dividends for decades, but its yield is a much larger — currently a whopping 9.5% — though it invests in many of the biggest S&P 500 stocks, including (AMZN), Apple (AAPL) And Microsoft (MSFT).

USA gives you access to highly profitable US companies without having to try to time the US dollar. You’ll also get an income stream of 9.5%, which is more than five times the average S&P 500 stock. (Though the annual total payout varies somewhat, as management has a policy of paying 10% of its net asset value — NAV, or the value per share of its portfolio — in dividends.)

Speaking of NAV, you get a little discount here in disguise. That’s because the US is trading at a balanced level with its NAV as of this writing. That’s unusual for CEFs, which often trade at discounts due to the 2022 sell-off, and especially large ones these days. However, the US has traded at an average premium of just under 3% over the past year, so you can still get a deal here.

Michael Foster is the Lead Research Analyst for Contrary outlook. For more great income ideas click here for our latest report “Unbreakable Income: 5 Bargain Funds With Constant 10.2% Dividends.

Disclosure: none

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