This 9.3% ‘Elite’ Fund Is Cheap (and Growing Fast)

An unusual trend has hit Silicon Valley that’s running far below the radar: a big shift toward paying dividends.

We’re going to take full advantage by grabbing something unheard-of, even for die-hard tech investors: A 9.3% dividend that grows.

That’s a real eye-opener for tech, to be sure. Because while more tech stocks are paying dividends these days—even long-time holdouts Meta Platforms (META) and Alphabet (GOOGL) now offer payouts—most of these are still tiny. (Meta and Alphabet both yield just 0.5%).

Of course, there are tech-dividend stalwarts that pay at least a bit more and offer long histories of payout growth, too, like Microsoft (MSFT) and Cisco Systems (CSCO), which yield 0.7% and 3.3%, respectively. When you factor in dividend growth, this duo can even beat established dividend payers beyond tech, like AT&T (T) and Chevron (CVX), two higher-yielding stocks you’ll find in a lot of portfolios.

Microsoft and Cisco Convert Fast Growth Into Payout Hikes

But let’s be honest: These tech stocks’ current yields are still pretty tiny, and that causes most income investors to overlook their sterling growth histories. Which is too bad, because dividend growth can have a huge impact, both on an investor’s long-term income and their capital gains:

Consider how Microsoft’s 1,120% return in a decade is miles ahead of the returns offered by the two non-tech stocks with much higher yields. You can see this with other low-yielding tech payers, too: They will almost always have a higher return than the higher-yielding tech firms that started paying dividends earlier, like Cisco and Microsoft.

So I completely understand if you choose to sacrifice some growth for income, as tech investors often do. But there’s an “elite” club of investors who do things differently. And this is where that growing 9.3% payout comes in.

I hate the word “elite,” but it fits here because these are a class of investors who’ve found a “hack” to get strong growth and high yields in the same investment.

As a result, they’re getting that 9.3% yield while holding some of the fastest-growing tech companies out there, including Amazon.com (AMZN), as well as less-popular firms like SPS Commerce (SPSC), a maker of software for managing supply chains, and tax-software firm Vertex (VERX).

Strong growth stocks like these have handed these elite investors a 9.4% annualized total return from capital gains and dividends over the last decade. The payout has moved higher in that time, as well.

Not a bad club to join, right? Well, I need to come clean: These people aren’t that elite, because anyone can easily join them.

The High-Income (and High-Growth) World of CEFs

The “elite” investment I’ve been telling you about is a closed-end fund (CEF) called the Liberty All-Star Growth Fund (ASG). It’s small, with just $300 million in assets under management. And as you can probably tell, it focuses on growth stocks, with a strong portfolio that includes the stocks mentioned above.

ASG is traded like a stock, which means you can buy it during regular trading hours from any online brokerage in America with just a few clicks.

The fund’s ability to pay that big yield is nice, but its ability to increase its payout (and drop regular special dividends) is the real showstopper here, especially since that payout growth is accompanied by strong total returns, too.

Growing Payouts and Capital Gains From Growth Stocks

Note that ASG does tie its payouts to the performance of its underlying portfolio, so they float from year to year, as you can see above. That, by the way, is a feature, not a bug, since it lets management invest more money when there are bargains to be had. And at the fund’s current yield, these elite investors can pull $93,200 a year in passive income from a $1-million passive investment.

Since ASG only costs $5.15 a share as of this writing, you can jump in at a low price and build your income stream by buying more shares over time. Moreover, ASG is a bargain in relation to its portfolio value, too. As I write this, it trades at a 9.3% discount to net asset value (NAV), well below its five-year average discount of 0.4%.

That’s how the elite club does it. But they don’t just do it with ASG.

This is one of many high-yielding CEFs out there that hold high-quality assets and offer big yields, with the entire asset class yielding an average of 8.2% now. CEFs hold stocks, bonds, real estate, utilities and other assets, and pass as much of the profits as possible to us as income.

What’s more, CEFs are regulated by FINRA and the SEC, so you’re buying into an established, reputable corner of the investment world here. In fact, some CEFs trace their roots back to the late 19th century.

It’s worth repeating: This club of “elite” investors isn’t exclusive at all. Thanks to funds like ASG, you can easily join them, starting with just a few shares.

— Michael Foster

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Source: Contrarian Outlook