The latest trade-war hype has served up a terrific opportunity for us to bag 6%+ dividends (and upside) in closed-end funds (CEFs).
Today I’m going to show you exactly where to look (hint: it’s the last place you’d expect) and reveal a CEF with serious upside in 2020. It’s set to ride this unheralded opportunity while dropping its generous 6.5%+ dividends on us.
First off, I hope your nest egg didn’t fall into this “tariff trap”…
That’s what the market did when President Trump announced his first tariffs on China two years ago, on solar panels and washing machines. Of course, those products are a blip on the Chinese economy, but they were just a warning shot. When Trump got serious, the first-level crowd really dashed for the exits!
Markets freaked out, resulting in the S&P 500’s first bear market in a decade. And it wasn’t just investors getting scared. Pundits lost it, too: Newsweek warned that “Trade war escalation could bring a recession within six months.”
All of this fear didn’t help, so stocks fell.
I, however, had a different take. Back on September 27, 2018, I wrote, “The drag on the economy from tariffs is too small to matter,” meaning any downturn in the market was a time to buy. Since then, America’s GDP has continued to grow:
No Recession Here
So much for the disastrous trade war!
While those doom-and-gloom prognosticators might feel a bit embarrassed, the real losers are people who sold on the fear those prognosticators encouraged. As a result, they missed out on this return since the start of the trade war!
But herein lies our opportunity—and the reason why pundits who say today’s market is in a bubble are all wet: that 13.7% return over two years comes out below 7% annualized, which is less than the S&P 500’s long-term 8% annualized return. That means it’s not too late to get in.
So what should we be buying? This is where the story gets really interesting.
Foreign-Focused Firms are Still Winning
The twist here is that foreign firms (and internationally focused US companies) are actually still delivering strong returns. In a world with rising tariffs, that just shouldn’t be happening.
We can see this by looking at the Fidelity Export and Multinational Fund (FEXPX), one of the few funds that focuses on firms that do most of their selling abroad. When we look at this fund’s returns over the last year, we see it’s had a strong 20% return since the start of 2018.
That’s well ahead of the SPDR Midcap 400 ETF Trust (MDY), a fair indicator of domestic-company performance, given that these firms make up a considerable portion of US midcap stocks.
As you can see above, foreign-focused companies have delivered strong returns because of strong sales numbers, even if we include the trade-war selloff fears that drove 2018’s weakness. But in 2019, the market slowly began to understand what I’d said in 2018: the drag on the economy from tariffs is too small to matter.
The Foreign Approach
American companies that sell abroad aren’t the only way to play into this trend. Another is to invest in foreign countries that are enjoying growth thanks to the rising tide of a growing global economy—and global trade ties strong enough to resist trade-war jitters.
Take, for instance, the Brandywine Global Income Opportunities Fund (BWG), a global debt fund that invests in bonds from foreign firms and foreign countries. BWG trades at a whopping 10.8% discount to net asset value, despite its generous 6.5% dividend yield and tremendous recent performance.
BWG is just one of many foreign funds you can use to get exposure to one of the best opportunities in the new post-trade war market of 2020.
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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