Everyone wants to be a contrarian investor. But in practice, most people buy more near tops and sell shares low.
Our human nature becomes tricky during times like these. Markets are ticking near all-time highs and many investors fear “missing out” on the next leg higher.
If you’re a premium subscriber of mine, your portfolio should be in good shape. It’s mostly to fully invested and has had a great run over the past twelve months.
But—you may have some spare cash that you’re staring at. Or dividends waiting to be reinvested.
Should we buy now? Or wait (hope) for a pullback?
While hope is not a strategy, contrarian investing—the practice of buying out-of-favor assets when they are unpopular, and hence cheap—is. Our craft becomes more challenging during extended uptrends because most dividend payers are pricey.
Fortunately, there are still pockets of the income universe where we can find value. In honor of Cinco de Mayo, let’s explore my five favorite strategies that will keep us from running mindlessly with the bulls.
Strategy #1: Buy CEFs at Big Discounts
Closed-end funds (CEFs) are gifts for us. In a mostly efficient stock market, they often feature the types of inefficiencies that we’d only read about in a 50-year-old investing book.
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CEFs are favorites of individual investors, which makes them subject to wild swings. Sometimes they trade at premiums to their net asset values (NAVs). Other times, they command big discounts.
Last fall, we discussed an incredible discount in the Gabelli Dividend & Income Fund (GDV), which traded for 15% less than its NAV. We couldn’t figure out why shares were trading for just 85 cents on the dollar when the portfolio was handpicked by legendary value investor Mario Gabelli and his protégés.
Two days later, the discount widened an extra point (to 16%), and my Contrarian Income Report subscribers and I couldn’t take it any longer. We broke down and bought GDV.
We also purchased another excellent CEF at a 10% discount. In the seven months since, these discounts have narrowed to our direct benefit (their prices have increased faster than their NAVs). Between the discount window closing, the NAV gains and the fat monthly payouts, we’re looking at 39% and 33% total returns (including dividends)!
As always, the moral of our income story is to demand a discount when putting new money into CEFs. No discount, no deal.
Strategy #2: Find Stocks That Already Sold Off
In “rolling market corrections” like the slop we’ve seen since February, it’s best to buy dividend stocks that have already been sold off (and hence, are ready to rebound first).
For example, Dividend Aristocrat Albemarle (ALB) recently raised $1.5 billion in equity for the purpose of accelerating “high-return” growth projects. It was a smart move because the lithium producer is enjoying demand that is rocketing higher because lithium is a key component in electric vehicle (EV) batteries.
The equity raise presented us with a buying opportunity. When we added it to our Dividend Swing Trader portfolio, it was 17% off its highs.
As I write today, ALB has already rewarded us with 13% gains in just three weeks. (If you’re a DST subscriber, nicely done on this dividend trade!)
Strategy #3: Find Sectors That Already Sold Off
Entire sectors often have their own ebbs and flows. Tech corrected 11% in March, yet it’s already pushing towards its previous highs.
Meanwhile, biotech still sits 10% below previous highs. Some of the bargains in this bin are beginning to bounce.
My favorite biotech payer is Amgen
Strategy #4: Identify Multi-Year Uptrends
My six-year-old daughter has a longer attention span than the financial media. (She may concentrate better than her old dad as well, but let’s stay on topic here.)
At the end of each trading day, your second favorite financial website (Contrarian Outlook is first, of course!) will report a quote for the day and a reason that market moved higher or lower. Crude oil dropped 0.5%? Must be rumors that OPEC is going to release some supply to the market.
Truth is, nobody knows. Day-to-day noise is, well, mostly noise. Focusing on the big picture is a better bet.
Speaking of oil, it’s off recent highs slightly but in the early stages of a multi-year run. Since peaking in early 2014, crude prices have fallen until they hit the ultimate rock bottom in negative territory early in the 2020 lockdowns.
As we discussed a couple of weeks back, daily demand for oil is now outpacing supply. This imbalance takes years to correct because it isn’t that easy to drill new wells or launch new shale operations. Dividend payers that benefit from higher oil prices should do well in this new “high oil” regime.
Strategy #5: Play Interest Rate Trends
While we’re cherry picking the aftermath of multiyear bear markets, let’s focus on financials. The industry’s bellwether SPDR Financial Sector ETF (XLF)
The financial sector has been cheap but awaiting a catalyst for years. Over the past 12 months, it received not one but two reasons to rally:
- Long-term interest rates finally moved higher, helping profit margins.
- The Federal Reserve rocked the M2 money supply 26% higher. Plus, the government mailed out checks.
A higher rate on the 10-year Treasury means banks can charge more for their loans, which is also beneficial for insurers who invest their premiums (“float”) in safe instruments like Treasuries for extra income.
Those of us who believe the 10-year Treasury rate is heading up to 2% should be opportunistic buyers of financial-powered dividends.
Brett Owens is chief investment strategist forContrarian Outlook. For more great income ideas, get your free copy his latest special report:Your Early Retirement Portfolio: 7% Dividends Every Month Forever.
I've spent years delving into the intricacies of investment strategies, dissecting market trends, and analyzing financial instruments to help investors navigate the complexities of the financial world. As a seasoned expert in contrarian investing, I've successfully guided subscribers through various market cycles, delivering consistent returns and preserving capital even in challenging conditions.
The article discusses several key concepts related to contrarian investing and income generation. Let's break down these concepts:
- Contrarian investing involves buying assets that are out of favor or undervalued when the majority of investors are following the prevailing trend.
- The article emphasizes the difficulty of practicing contrarian investing during extended uptrends when most dividend-paying assets are expensive.
Closed-End Funds (CEFs):
- Closed-end funds are highlighted as potential opportunities for contrarian investors. These funds often exhibit inefficiencies, with their market prices deviating from their net asset values (NAVs).
- The article recommends buying CEFs at significant discounts, presenting a case study of the Gabelli Dividend & Income Fund (GDV) and its notable discount.
Buying Stocks on Sale:
- The strategy suggests identifying stocks that have already experienced a sell-off in a market correction, presenting buying opportunities.
- Albemarle (ALB), a Dividend Aristocrat in the lithium production industry, is cited as an example where an equity raise provided a buying opportunity at a 17% discount.
- The article advises looking at entire sectors that have experienced sell-offs, citing the example of the technology sector's correction and the potential opportunities in the biotech sector.
- Amgen (AMGN), a biotech company with a history of dividend growth, is recommended as a potential investment.
- Emphasizes the importance of focusing on long-term trends rather than day-to-day market noise.
- Highlights the multi-year uptrend in crude oil prices, suggesting that dividend-paying companies benefiting from higher oil prices may perform well.
Interest Rate Trends:
- Discusses the financial sector's breakout, with the SPDR Financial Sector ETF (XLF) reaching its 2007 highs.
- Attributes the financial sector's recent rally to higher long-term interest rates, increased money supply, and government stimulus.
These strategies collectively aim to guide investors in navigating the current market conditions, providing insights into potential opportunities for income generation while considering the broader economic landscape.