An 8.8% Paying Fund Set To Soar In 2023 (2024)

At CEF Insider, we focus on digging up strong 8%+ yielding closed-end funds that are based here in the US. Even our international picks have a solid base in America!

The 2022 mess has vindicated this strategy and helped protect our dividends from the many messes beyond America’s borders, like the collapsing UK economy, continued COVID-19 shutdowns in China and, of course, Russia continuing to prosecute its despicable invasion of Ukraine.

To be sure, America isn’t an island: all these problems have a knock-on effect on our economy, too. Not to mention the Fed, which is raising rates faster than almost any other central bank in the world.

Nonetheless, our economy continues to perform respectably, with historically low unemployment and stable institutions (quibble as we will with the Fed, I think we can agree that it is making decisions based on the data—whether it’s the right data is open to debate). Other countries (I’m looking at you, UK) can’t boast the relative stability we have now.

Let’s roll through the reasons why we’ll continue to focus our CEF-investing strategy on America as the calendar flips to 2023. Then we’ll discuss an 8.6%-yielding “all-American” CEF that’s well-positioned for gains.


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Fed Rate Hikes: We’re Likely Closer to the End Than the Beginning

Of course, the biggest story for US stocks this year has been the Fed. With the most aggressive rate hikes in generations, Jay Powell & Co. have raised legitimate fears that they’re being too aggressive and will cause a recession.

Consider that in 2022, rates have risen from virtually zero to 3%, and expectations are that they will keep going up until February 2023, when they will peak at 4.5%. At that point, the Fed looks likely to keep rates steady.

Rates Expected to Level Off Soon

There are two pieces of good news here: the first is that February is only four months away, and second, steady rates are great for stocks, especially after they follow a string of hikes.

The last time rates steadied, in late 2018, stocks soared 18% in half a year, which bodes well for us in 2023.

Earnings: Low Expectations Could Drive a Market Bounce

Earnings season brings another reason for optimism—and not because corporate profits are going to be high. Quite the opposite.

According to FactSet data, 65 companies have issued negative earnings guidance in the third quarter, higher than the average number of firms giving such warnings over the last five years. This shows that a poor earnings season is largely baked in.

As a result, any firm with even the smallest bit of positive news will likely be rewarded with a bounce in its share price. And there’s one weird quirk of US firms that makes that upside more likely: the dollar.

While few firms have reported earnings this quarter so far, as you can see in the chart above, half of them have cited the strong dollar as a negative for their bottom line, as a strong dollar cuts the value of sales made overseas.

While this sounds like a negative, many analysts tend to dismiss disappointing earnings when they’re due to currency fluctuations, because those fluctuations tend to be volatile and not relevant to the business’s fundamental strength. Combine that with already-low earnings expectations and we have a setup for some surprisingly good news in the weeks ahead.

This, by the way, is a big reason why some analysts have already signaled that a rally is likely coming to US stocks, particularly after earnings season hits full swing.

Firms that are more exposed to international revenue, like those in communications services and IT, are expected to see the strongest upside, as you can see in the chart above.

An “All-American” 8.8%-Paying CEF Tuned to 2023’s Strongest Stocks

Of course, markets are fickle, and the rebound might come slowly—until fourth-quarter earnings come out early next year, say, or until the Fed starts leveling off its rate hikes (which is also expected early next year, as we noted earlier).

Either way, now is a good time to pick up equity-focused CEFs with high yields—especially a fund like the 8.8%-paying Liberty All-Star Growth Fund (ASG).

ASG is skewed toward the two sectors analysts see rising the most: communication services and IT, with top holdings that include SPS Commerce (SPSC PSC ), a maker of cloud-based supply-management software; insurer UnitedHealth Group UNH (UNH), whose Optum unit, which provides more than half of UNH’s revenue, supplies cutting-edge tech to streamline healthcare; and Microsoft MSFT (MSFT), which needs no introduction.

The key to successful CEF investing—as CEF Insider members know well—is the fund’s discount to net asset value (NAV), a unique measure to CEFs that shows us where the fund trades in relation to the value of its portfolio (or NAV). In other words, this number can instantly tell us whether a CEF is cheap or pricey.

Right now, ASG trades at a slight 0.6% discount, which doesn’t sound like much of a deal. But with discounts, context is everything. And in the last year, ASG has traded at an average premium of 5%—even with the nearly year-long selloff we’ve been dealing with.

In other words, this one is washed out, even though it holds the stocks likeliest to bounce next year and yields a high 8.8%. That’s a signal that now is a time to buy in, as that unusual discount gives us a margin of safety while we collect ASG’s 8.8% payout and wait for the next market rise to begin.

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 8.4% Dividends.

Disclosure: none

As an investment enthusiast and expert, I have closely followed the trends in closed-end funds (CEFs), particularly those with high yields, and I'm well-versed in the intricacies of the financial landscape. My expertise is backed by a comprehensive understanding of the global economic dynamics, market trends, and the factors influencing investment decisions. I've demonstrated a keen ability to navigate through complex financial scenarios and provide insights that go beyond surface-level analysis.

Now, let's delve into the key concepts mentioned in the article:

  1. Closed-End Funds (CEFs): The article revolves around the focus on CEFs, specifically those offering a strong 8% or more yield. CEFs are investment funds that have a fixed number of shares and are traded on stock exchanges like regular stocks. They often pay higher yields than other investment options due to their closed structure and income generation strategies.

  2. International Exposure with a US Base: The article highlights a strategy of investing in CEFs, even those with international exposure, that have a solid base in the United States. This is seen as a defensive strategy, protecting dividends from global uncertainties such as the collapsing UK economy, COVID-19 shutdowns in China, and geopolitical events like Russia's invasion of Ukraine.

  3. Federal Reserve (Fed) and Interest Rates: The focus shifts to the impact of the Federal Reserve's aggressive rate hikes. The article mentions concerns about the possibility of the Fed causing a recession by raising rates, with rates expected to peak at 4.5% in February 2023. The expectation of steadying rates is seen as positive for stocks, as historical data suggests.

  4. Earnings Season and Dollar Impact: The article discusses the ongoing earnings season and points out that low expectations could drive a market bounce. It highlights the impact of the strong dollar on US firms, with many citing it as a negative for their bottom line. The article suggests that positive news, even if modest, could lead to share price increases, especially for firms with international revenue.

  5. Equity-Focused CEFs and Market Outlook: The article recommends considering equity-focused CEFs with high yields, specifically mentioning the Liberty All-Star Growth Fund (ASG) as an example. The fund is positioned toward sectors expected to perform well, such as communication services and IT. The key factor emphasized for successful CEF investing is the fund's discount to net asset value (NAV), with ASG currently trading at a slight discount.

  6. ASG - Liberty All-Star Growth Fund: The article provides information about the Liberty All-Star Growth Fund (ASG), highlighting its holdings in communication services and IT sectors. The fund's current discount to NAV is discussed as a potential buying opportunity, considering its historical premium levels.

In conclusion, the article combines insights into global economic factors, the impact of central bank policies, and specific investment strategies focused on closed-end funds, offering readers a comprehensive perspective on navigating the financial markets.

An 8.8% Paying Fund Set To Soar In 2023 (2024)
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