Our favorite dividends are now on sale—but we still need to make sure we’re buying this dip the right way.

That means zeroing in on rich payers that not only throw off big divvies, but cushion our downside, too.

I’ve got two closed-end funds (CEFs) for you that do just that—and throw off rich 7%+ yields, too. And they avoid the deadly mistake most investors are making now.

Index Funds Pay Little, “Bargain” Techs Even Less

That mistake? Most investors are looking to beaten-down tech stocks (which pay zilch—or close to it!) or they’re grabbing a “plain vanilla” index fund, like the SPDR S&P 500 ETF Trust (SPY)—current yield: 1.1%

One-point-one-percent!

Want a $50,000 yearly income stream from SPY? Hope you’re prepared to invest almost $5 million. It’s too bad, really, because SPY buyers can grab dividends 7X bigger when they go just a bit past ETFs to CEFs.

What’s more, since CEFs often hold the same stocks as ETFs (and are also publicly traded), switching to a CEF often means you don’t even have to change investments to get those payouts!

The fund we’ll discuss next is a good example: It holds all the stocks in SPY, but instead of a sad 1.1%, you’ll grab a 7.8% yield that actually gets safer when markets turn nasty.

Flip the “Y” in “SPY” for “XX”—and Bank 7.8% Payouts

The CEF in question here is SPY’s CEF cousin, the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX).

The tickers are the same for a reason: like SPY, SPXX holds the stocks in the S&P 500, like Apple (AAPL), Microsoft (MSFT) and Visa (V). But instead of SPY’s 1.1% dividend, you get SPXX’s sweet 7.8%.

Why the difference? SPXX uses a volatility-slashing strategy of selling call options on its portfolio. These options, which give the buyer the right to buy SPXX’s stocks at a fixed future date and price, generate extra income because SPXX keeps the “premiums” these buyers pay. It then uses them to fund our payouts.

That strategy can cap upside in a rising market, as some of SPXX’s holdings get “called away.” But it also gives us most of our return as cash dividends, which is mainly where it stems from volatility.

This year’s market gains have put SPXX on the outs with the mainstream crowd, but something curious has happened in the last few weeks: The fund’s net asset value (NAV, or the value of its underlying portfolio—see orange line below) has risen, while its price on the open market (heavily influenced by investor sentiment), has dropped (purple line).

NAV Rises, Price Drops, Setting Up a Buy Window

This is an ideal setup in a CEF, where the portfolio is fine but the price is dropping, driven by sentiment alone. The resulting 9.8% discount to NAV this leaves us with is obviously way overdone, and a good entry point for this 7.8%-paying “SPY clone.”

Swap Your Bond ETFs for This 9.7%-Paying CEF

This lean toward ETFs isn’t only hurting stock buyers—it’s weighing on bond investors, too.

We’ve recently written about how Treasury Secretary Scott Bessent is now using mainly short-term debt to fund the government.

That gives Uncle Sam lower interest rates, as short-term rates (which are controlled by the Fed) are usually lower than long-term rates. Bessent then uses the cash he raises to buy long-term Treasuries, effectively putting a floor under 10-year Treasury yields.

Look, this kind of thing makes the capitalist in me cringe, but it does also throw a floor under our favorite corporate bond funds (as bond prices move inversely to rates).

One thing you do not want to do at a time like this is pick up a corporate bond ETF like the SPDR Bloomberg High-Yield Bond ETF (JNK), which pays 6.5% today. That’s not bad, but pales in comparison to the payout of a corporate-bond CEF like the 9.7%-yielding DoubleLine Yield Opportunities Fund (DLY).

Not only is DLY’s yield 50% larger than that of the index fund, but it also comes your way monthly, with the odd special dividend thrown in. That’s something no ETF (that I’ve seen, anyway) can match:

DLY’s Steady—and Monthly—Payout Tops ETFs in Every Way

Source: Income Calendar

When it comes to performance, there’s no comparison. DLY is run by Jeffrey Gundlach, the so-called “Bond God,” who’s as well-connected as they come.

DLY launched in February 2020, weeks before the COVID dumpster fire. That let it buy the dips in February and March 2020, while the world went into lockdown.

And since bonds started to get up off the mat in late 2022, DLY has routed JNK, as always happens with expertly run CEFs like this one.

The “Bond God” Grabs an Extra Jump in the Rebound

Even so, we can still grab DLY at an 8.4% discount to NAV. That’s a sweet deal—well below the fund’s five-year average of 4.8%—and far cheaper than JNK, which, as an ETF, never trades at a discount.

— Brett Owens

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Source: Contrarian Outlook