About a month ago, Mike Bird, the Wall Street editor for The Economist, tweeted (or “X-ed,” I guess I should say) the following: “You have to concede that there would be a form of stupid, ridiculous beauty in the S&P 500 closing completely flat for April.”
And, well, after all the drama we saw in April, that’s pretty much where we landed.
I once met Mike for coffee, and he’s a friendly, intelligent person, so it’s easy for me to agree with him here: Yes, the market behaved stupidly in April, starting with the tariff selloff and ending with the first hints of a deal with China (with various back-and-forth moves on tariffs in between). But there’s a lot we can learn from that wild month.
Let’s look at three things that stand out, especially for those of us who aim to invest for high income and a “dividend-driven” retirement.
April Takeaway No. 1: Diversification Works
While stocks have struggled to get into the green this year (and mightily in April!), corporate bonds are up: The benchmark for corporates, the SPDR Bloomberg High-Yield Bond ETF (JNK), has returned a little more than 2% year to date as I write this.
We, of course, prefer to buy bonds through closed-end funds (CEFs), for two reasons:
- Active management: CEFs—especially those with well-connected managers—have a big advantage over ETFs. The bond world is small, and it pays to “know people who know people” to get in on the best new issues.
- Bigger dividends: The bond-fund bucket of the CEF Insider portfolio has funds yielding up to 13.7% as I write this, and …
- Discounts to net asset value (NAV, or the value of the fund’s underlying portfolio), which give us additional upside as they shrink. That’s in addition to gains in the value of the portfolio.
A good example is the PGIM Global High Yield Fund (GHY), which we added to the CEF Insider portfolio in late January. It’s outperformed the S&P 500 since, as of this writing.
Why is GHY beating stocks? The CEF invests in corporate bonds, whose big yields have held up, thanks to the Fed keeping rates higher. That’s letting GHY sustain its 9.7% dividend and attract more investors, especially since defaults have remained low among US and global companies.
It’s a good example of how we can blunt the effect a stock-market crash on our portfolios by investing elsewhere. And of course (and maybe more important!) we diversify our income stream, too. Let’s talk about that next.
April Takeaway No. 2: Dividends Keep Us From “Forced Losses”
GHY, as mentioned, yields 9.7%, or about $80.83 per month per $10,000 invested. That’s a lot more than the $10.25 per month you’d get from an S&P 500 index fund.
The typical index fund’s tiny income stream means that if an investor needed to sell stocks to fund their needs in April, they faced a much higher risk of being forced to do so at a loss. That’s not the case with GHY, with its 9.7% payout. Hence the month was an opportunity for GHY buyers, especially those who bought more when GHY sold off at the start of April.
April Takeaway No. 3: Irrational Investors Give Us an Opportunity
The market also, of course, gets it wrong and overshoots to the downside all the time. That mispricing is something we can pounce on.
Yet again, GHY is an example here. When we added it to the CEF Insider portfolio in January, it was trading at a 3.25% discount to NAV. Now it is trading around par and has moved solidly into premium territory a number of times since our buy.
As more investors diversify away from stocks and find streams of income to tide them over amidst uncertainty, I expect GHY to see a healthy premium yet again.
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 Steady 8.6% Dividends.”
Disclosure: none
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