Santa Claus Rally Ahead? You Bet. Here’s How to Ride It With 11%+ Dividends

It’s that time of the year again. I’m not talking about shopping for the kids, I’m talking about 2024 predictions—especially for our favorite dividend plays: big-yielding closed-end funds (CEFs).

It’s a particularly good time to talk about CEFs because the 2022 selloff has left us some pretty sweet deals that are still around … even though 2022 ended more than 11 months ago! Chief among these “held-over” bargains is the 11.7%-paying CEF we’ll get to in a sec.

First, when it comes to predictions, we should be clear that these days, the market mood tends to shift around the time the calendar flips. We saw this last January, and prior to that in early 2022 (when inflation fears got real) and in 2021 (when a pandemic recovery seemed likely).

Prognosticators seem to be aware of this because this time around they’ve gone out of their way to say their confidence in their 2024 forecasts is low.

Predictions of next year’s economic growth from US banks, for example, range widely: The Economist reported US GDP estimates of a bit over 1% growth (from UPS) for 2024, to more than 2% (Goldman Sachs).

This is different from last year, when we were told the odds of a 2023 recession were 100%—a call that turned out to be 100% wrong, as we could tell simply by following the data here at CEF Insider.

Recession calls missed the mark because earnings gained as the market climbed out of the 2022 panic. The 5% earnings growth in the third quarter of 2023, happening against an already strong 4% rise in 2022, shows real momentum that we see in other data points (slowing inflation, continued retail-spending strength and consistently low unemployment, for example).

All of this has driven stocks to the high, but somewhat range-bound, movement we’ve seen since early summer.

Stock Prices Shook Off Last Year’s Gloomy Predictions

“Sell in May and go away” is a cliché you hear a lot in the spring, and the summer market softness that underpins that saying can show up when there’s no major news, as has been the case since the Silicon Valley Bank collapse and mini-crisis fizzled.

But enough about the past. Let’s look at what the next couple months could hold for us.

Technicals Bode Well for a Santa Claus Rally

We rarely use technical analysis at CEF Insider, but it’s useful here because we see the formation of an “inverse head-and-shoulders” pattern—a textbook bullish setup. The breakout in November, then, was not surprising and is a sign of bear capitulation.

In plain English, this means the idea that we’re facing another crash, an idea that’s had a lock on risk-averse investors for two full years, has finally become unfashionable.

December’s Strength

There’s little reason for December to spoil the party unless we get bad economic news, and that’s rare in December, since holiday spending masks any issues at least until January (one reason why market moods can quickly shift at the start of a new year).

This tells us that stocks are ripe for continued strength, for the same reasons that have powered the market over the last few months: resilient consumers, falling inflation and companies managing higher rates relatively well. We can hope the mood continues in 2024 (but we will, of course, watch economic data like hawks after the new year!)

What do we do in the meantime? Simple: buy—and collect outsized income from—an underpriced fund that’s likely to look very attractive to investors facing cautious optimism in early ’24.

AIF’s 11.7% Dividend, 12% Discount, Make It a Smart End-of-Year Buy

The Apollo Tactical Income Fund (AIF), a CEF Insider holding with a portfolio of loans and corporate bonds, fits the bill here. It’s severely undervalued, trading at a 12.4% discount to net asset value (NAV, or the value of its underlying portfolio).

That’s despite the fact that AIF is managed by Apollo, one of the largest private credit and equity firms on earth, with over half a trillion dollars in assets. AIF pays that 11.7% dividend and actually raised its payout a bit recently.

AIF’s Strong Return and Income Boost

Big as that 11.7% yield is, it’s actually down a bit from the 12% yield the fund posted at the start of the year, due to its strong recovery, which cut the yield on its market price.

With its higher income stream and gain in NAV (the orange line in the chart above), AIF is telling the market that it’s very confident it can maintain payouts. After all, high-yield bonds are paying 8.3% on average, not far from AIF’s 10.3% yield on NAV, or the yield management needs to cover the monthly payout.

AIF has quietly been a strong buy for a long time, but investors have been slow on the uptake. This isn’t AIF’s fault—this lag in interest has been across the board with CEFs. You can see it in the chart below, which shows that US equity CEFs are up 2% this year, far below the S&P 500’s 20% return.

CEFs Hit a Speed Bump

Source: CEF Insider

This isn’t because CEFs are underperforming—NAVs have been growing alongside funds’ benchmarks. Instead, it’s due to market-price returns falling back.

The upshot is that CEF investors are getting into the market more slowly, causing discounts like that of AIF to remain. That means the buying opportunity has been extended, especially for this fund.

Finally, let’s bear in mind that this is a corporate-bond fund, not a stock fund. Its consistent and growing income stream is a great hedge against uncertainty in 2024. At the same time, it keeps us exposed to the increasing optimism finally taking hold in the market, thanks to more good economic news.

5 More Monster Dividends to Buy NOW (With Payouts Every Single Month!)

That lag in investors moving into the market is also a prime setup to buy my top 5 monthly paying CEFs. They yield 9.2% on average and trade at such deep discounts I’m calling for swift 20% price upside—as soon as this time next year!

I’ve posted a complete rundown of these 5 stout monthly payers right here, along with an opportunity for you to download a FREE Special Report revealing their names and tickers. Don’t miss your chance to grab these monthly income plays while they’re cheap!