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One of the great things about closed-end funds (CEFs) is that there’s one out there we can use to tap just about any trend—and turn it into a nice 7.1%+ dividend payout.
Take the surge in retail we saw last month. Despite the pandemic, Americans are hitting the stores again (with many doing so online).
In January, retail sales jumped 5.3%, far ahead of economists’ expectations of 1.2% gains. This was helped by a 0.7% sales drop in December, but it’s undoubtedly the result of the latest round of stimulus checks.
Retail ETF Soars, But Its Dividend Leaves Much to Be Desired
That’s great news for retailers because it proves that consumers are spending their COVID aid money instead of hoarding it. So it should come as no surprise that the mainstream crowd has bid up the SPDR S&P Retail ETF (XRT) XRT -0.4% in response.
It’s also no surprise that online retailers like Overstock.com (OSTK) have swelled to make up a quarter of XRT’s portfolio.
Brick-and-Mortar Surrenders to the Web
XRT Sector Allocation
Of course, this shift toward retail is also great for advertising companies, such as XRT’s second-largest component, online-advertising firm Magnite (MGNI), which is used by many retailers. And, unsurprisingly, since we’re talking about online advertising, a lot of retailers’ ad spend will end up with Alphabet (GOOG), Facebook FB +1.1% (FB) and Amazon.com (AMZN).
Trouble is, those last three tech giants aren’t held by XRT, so you won’t get exposure to them by purchasing the fund. And worse, XRT yields just 0.9%, a pathetic payout that’s below even the paltry 1.5% the average S&P 500 stock pays.
This CEF Crushes XRT, Yields 7.1%
We can do better with a CEF that gives you exposure to all of the above names, pays a dividend that’s more than seven times bigger and has beaten XRT over the long run, too.
That would be the Liberty All-Star Growth Fund (ASG). Not only is this CEF a great way to play the retail bonanza, it has also been a more reliable investment in the retail sector on its own, easily beating XRT in the long run. It’s also topped the broader market.
In addition to returning 269% in the last five years, ASG has delivered healthy dividend hikes and paid a very generous extra dividend at the end of 2020. (Note that ASG aims to pay out 8% of its portfolio value as dividends annually.)
I’ve admired ASG for a long time, and at the end of 2019, I flagged it for its domestic focus, which was a particularly strong asset at a time when investors saw China as the wave of the future. That hypothesis turned out to be wrong, even if China beat COVID-19 before the US.
This shows just how important it is to choose the right fund. While the Chinese stock market index handily beat the S&P 500 since I published that 2019 article, we see that ASG more than doubled the S&P 500’s return and easily beat the Chinese index, too.
That’s because ASG’s selective focus on high-growth stocks set it up to navigate 2020’s volatility and benefit from consumption shifts around the world due to the pandemic.
Those gains are likely to hold, by the way, and taking the China option now looks riskier than ever. If we go back as long as all three of these funds have existed, we see that ASG has been the top performer—and, crucially, Chinese shares have performed only half as well as the S&P 500.
Finally, let’s not forget that ASG’s 7.1% yield is nearly five times that of the S&P 500, and if history is anything to go by, ASG’s dividend is set to keep growing.
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 8.3% Dividends.”
I have worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies. My reports are widely read by