Think we’re stuck with pathetic dividends and sluggish growth in 2020?
I get it. Many folks I talk to see the coming year this way. Some are even selling stocks, in a doomed effort to “lock in” gains. The problem? What the heck do you do next?
Sitting in cash means watching helplessly as inflation erodes your nest egg. And dividends? Forget it! You’ll kiss those goodbye the moment you hit the “sell” button.
Here’s the good news: you’re not stuck between the pathetic sub-2% payout on regular stocks and the 0% you’ll get in cash. There’s a better way—one that pays you huge 6%+ dividends and regularly crushes stocks!
I’m talking about closed-end funds (CEFs). I’ll give you an example of one that yields 6.6% now and has outrun the S&P 500 since inception shortly.
First, let me tell you why there are good reasons to be optimistic about the markets this year.
Yes, the 30% gain in 2019 was the best one-year return for stocks since 2013, and that’s naturally raised fears that the other shoe is about to drop.
But there’s a missing side to this Chicken Little story: 2019’s run was largely due to the bear market of 2018, which left 2019 with an easier upward path. If you go back over the last two years, you’ll see that stocks are up about 12% annualized, which is a bit on the high end, but far from heady bullish territory.
As a result, my research indicates that we can expect something like a 12% return for 2020, too. It’s not just the continuation of that two-year trend driving my prediction here; there’s one more factor—one you don’t hear enough about: earnings.
The Profit Picture: Why 2020 Is Different
Analysts are just now releasing their 2020 forecasts, and they expect earnings to rise 9.6% in the coming year, the third-best growth rate in the last seven years.
The Earnings Rebound Begins
There are two drivers behind this spike in earnings growth: first, much like we saw with stocks in early 2019, the lack of earnings growth last year gives profits a low base from which to rise. As well, the big decline in earnings we’ve seen in some sectors, like energy and industrials, will help these areas see higher profit growth in 2020, potentially pulling the entire market average up with them.
How to Invest for 6%+ Dividends (and Upside) in 2020
This does not mean your best bets are in energy and industrials!
Despite their huge profit declines in 2019, investors have pumped a lot of money into both of these sectors. And while energy’s 2018 gains were humble compared to those of the rest of the market, they’re still undeserved in light of the sector’s years of lagging profits or outright losses, as well as the volatility of oil prices.
Instead, your best play is to take a more balanced approach, while, of course, staying invested in stocks.
But don’t make the same mistake most investors do when they hear the words “balanced approach”: buy an index fund like the Vanguard 500 ETF (VOO) and tolerate the sub-2% dividends you get, waiting 40 years or longer for compounding to get you enough capital to squeeze a middle-class income out of your portfolio.
You’ll triple your dividends (and then some) by going the less-trodden CEF path. You’ll also give yourself a chance to outperform the overall market, too.
A 6.6% Dividend, With Upside, in 2020
For instance, the General American Investors Fund (GAM) pays a 6.6% dividend yield, thanks to a big special year-end dividend taken out of the fund’s profits. This big income stream means your investment in GAM will pay out over three times more income on an annual basis than VOO or any S&P 500 index fund, even though you’re still holding S&P 500 stalwarts like TJX Companies (TJX), Microsoft (MSFT), Republic Services (RSG) and Amazon (AMZN).
As you can likely tell from that shortlist of top holdings, this fund mixes aggressive growth stocks in the tech sector with high-cash-flow value stocks in other sectors. That gives you a well-rounded portfolio and helps reduce volatility.
Here’s the kicker: GAM has been crushing the market, going by both its market-price return and its net asset value (NAV, or the performance of the stocks it holds).
General American Investors
Over the last 20 years, GAM has been beating the market by a huge margin, all while paying out a superior income stream. That makes the fund a “no-brainer” choice over an index fund.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 8.5% Dividends.”
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