The market’s fall pullback is starting to reverse itself, but don’t worry: there are still bargain dividend payers yielding 7.4%+ dividends to be had out there.
But investing (along with everything in our lives!) has changed. You simply won’t get safe, high payouts by clutching to old habits and buying big-name, high-yielding S&P 500 stocks. The real dividend bargains are in closed-end funds (CEFs), which give you higher payouts, greater safety and often better returns over the long haul.
To show you what I mean, let’s line up three S&P 500 “dividend darlings” against the CEF competition and see how they compare. (Spoiler: it’s a blowout win for CEFs!)
AT&T: Big Dividend Lousy Return
AT&T (T) is a stock so old my grandmother has had it in her portfolio since before my mother was born. Ma Bell has been known as a huge income producer, with enticing 5%+ yields; today the stock’s yield is above 7%.
Such a big payout sounds like a slam dunk, so why not pick it up? To be honest, there are many reasons why this would be a bad move.
For one, AT&T’s net income fell 25% in 2019 from the prior year and has so far fallen 31.1% in 2020. As well, the company’s assets are barely growing as fast as its debts. Even if we ignored all of that, AT&T has badly underperformed the market over the long haul, even when you include its dividend!
The stock has done much worse than the alternative I’d suggest: the Liberty All-Star Growth Fund (ASG), which is full of companies that have beaten AT&T over the long haul, like Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOG).
Plus, ASG gives you much more diversification than buying a single telecom stock: the fund boasts 121 holdings spread over a range of sectors.
ASG’s timely stock selection has helped it dominate over the last 10 years, returning 329% to the S&P 500’s 256% and AT&T’s 72%. ASG also pays a 7.4% dividend, which is above AT&T’s payout, so you can lock in that big income stream while also buying into companies that are doing much better than AT&T.
Sometimes it’s hard to give up what seems like a winning play—which is why my grandmother has ignored my advice to sell AT&T for over a decade. But when we hold onto old beliefs in investing, we give up the big profits that emerging technologies provide. Just ask anyone who bought Amazon or Apple (AAPL) in the ’90s.
Tobacco Stocks: All Smoke, No Fire
Speaking of clutching to old beliefs, let’s talk about tobacco stocks, whose high yields—Philip Morris International (PM) pays 6.3% today, while Altria Group (MO), yields 8.7%—have always lured some investors in.
But of course, smoking has been on the outs for decades. And even the vaping fad, which is already fading fast, couldn’t help these companies. Over the last decade, both stocks have struggled to provide reliable returns, even with dividends included!
That’s why you’re better off with a CEF like the Gabelli Equity Trust (GAB). Its manager, famed value investor Mario Gabelli, has built GAB on sound principles of fundamental investing and buying high-quality stocks that are oversold. That’s a far better strategy than buying companies like Philip Morris, which are cheap for a reason—their businesses are shrinking.
GAB’s diversified portfolio is a healthier option, with stocks like PepsiCo (PEP), which deftly pivoted to healthy drinks, bottled water and snacks when consumers got more health-conscious. This shows you that Gabelli not only identifies companies that are cheap but also firms that can adjust to changing tastes. And that’s why GAB wipes the floor with the cigarette makers when we look at profits and payouts.
Plus, GAB pays out a lot more. Its yield is 11.7% now—far more than either tobacco stock pays, and with much more diversification, too.
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 8.8% Dividends.”