logo
Our Recession Defense Plan: Giant Monthly Dividends

Our Recession Defense Plan: Giant Monthly Dividends

Forbes13-04-2025

Monthly salary. On time money loan payment concept. Vector illustration isolated.
Although some tariff hikes have been paused, a recession is still very much in play.
Just a few days ago, I wrote that 'this is the time to recession-proof our retirement holdings.' And why not? GDP estimates have tanked. So has consumer sentiment.
Goldman Sachs made headlines for raising its probability of recession (from 20% to 35%). Fine, but equity analysts often get caught up in crowds.
What was more striking was hearing a similar message from the debt watchers. Consider this post from Mark Zandi, Moody's Analytics' chief economist:
Mark Zandi Recession Tweet
In my previous post, I showed readers how to recession-proof their portfolio with municipal debt. But tax-advantaged munis aren't the only way to hunker down for the worst.
A variety of debt would benefit if Treasury Secretary Scott Bessent's campaign to flatten long rates is successful. And we can get the most bang for our buck via closed-end funds (CEFs), which not only deliver much more yield—like the 8.9%-10.7% paydays I'll highlight today—than comparable exchange-traded funds (ETFs), but can trade at a discount to their net asset value (NAV), meaning we can buy those bonds for less than they're actually worth.
For instance:
Western Asset Inflation-Linked Opportunities & Income Fund (WIW)Distribution Rate: 8.9%
The Western Asset Inflation-Linked Opportunities & Income Fund (WIW) is an intriguing play if only because the current situation is so unique.
The majority of WIW's holdings (80%+) are inflation-linked securities, largely Treasury Inflation-Protected Securities (TIPS). The rest of its assets are sprinkled around investment-grade corporates, emerging-market bonds, non-agency mortgage-backed securities (MBSs) and other debt. The resulting portfolio is extremely high in credit quality.
The play here seems contradictory at first.
Trump's tariffs, if they hold, are widely expected to juice inflation, for obvious reasons. Research houses have been raising their CPI and PCE estimates left and right over the past few days.
But if inflation gets out of control, the Federal Reserve would swoop in and hike rates to try to quell rising prices like it has in the past, right? And if so, wouldn't that keep bonds grounded?
Possibly. But between federal-government purges and the potential for a lot of short-term tariff pain here at home, unemployment estimates are also going up. And while higher joblessness would weigh on inflation somewhat, it could also stay the Fed's hand and put downward pressure on long-term rates.
In short: Stagflation (high inflation + slow economic growth) is actually a win-win situation for TIPS, and thus a win-win for WIW.
And we can expect to get more out of WIW than a plain-vanilla ETF in a TIPS-friendly environment.
That's largely because of 30% debt leverage, which is an elevated amount that lets management go full-throttle on its highest-conviction picks. That same leverage is how WIW gets 9% monthly dividends out of such highly rated holdings.
Western Asset's fund trades at an 11% discount to its net asset value (NAV), so we're getting its holdings for 89 cents on the dollar. That's good—it would be great, but WIW has averaged a 12% discount over the past five years.
Nuveen Preferred & Income Opportunities Fund (JPC)Distribution Rate: 10.7%
Few debt CEFs will get anywhere close to WIW's portfolio quality, but we shouldn't look down our noses at Nuveen Preferred & Income Opportunities Fund (JPC), which also manages to squeeze a stellar yield out of a sterling portfolio.
As the name would suggest, Nuveen's CEF is a preferred-stock fund. Preferreds technically aren't debt, but they share a lot of the same characteristics. So they're bond proxies, and they too can thrive should we get lower long-term rates.
JPC specifically holds roughly 280 preferreds with a heavy overseas bent—currently, the portfolio is split 55/45 domestic/international. But the companies behind the preferreds are exactly what we'd expect from a preferred fund: Financial firms such as Barclays (BCS), JPMorgan Chase (JPM), and Wells Fargo (WFC) make up the lion's share of assets.
Credit quality is also much better than other funds in JPC's category.
With JPC, we're getting both the benefit of human managers (who can target underpriced opportunities) and an even loftier amount of leverage, at 39%. The result is, like WIW, a juiced-up version of a plain-vanilla index ETF:
JPC Returns
But look at that nasty dip at the far right. That's worse than a lot of bond funds, in part because preferred stocks—while 'preferred' compared to common equity—aren't as secure as true debt. Extreme fright in the equity markets can weigh on preferreds, too, which makes timing all the more important.
Right now, JPC is trading at a roughly 2% discount to NAV versus a five-year average of 5%. We're getting a bargain on this double-digit monthly dividend, and we could be suffering additional short-term headaches, too.
BlackRock Credit Allocation Income Trust (BTZ)Distribution Rate: 10.1%
I highlighted a BlackRock muni fund a few days ago, but it's not the only BlackRock product that's worth a look in this environment.
The BlackRock Credit Allocation Income Trust (BTZ) is a multisector bond fund whose managers have a true 'go anywhere' mentality. Right now, shares of BTZ give us exposure to investment-grade corporates (40%), junk (35%), developed sovereigns (17%), securitized products (11%), small amounts of bank loans and emerging-market debt, even a trace of equity.
The sizable chunk of high-yield debt means credit isn't stellar—in fact, on average (BBB-), it's about a step lower than the average multisector bond fund's credit (BBB).
We get the same combination of opportunistic management and high (35%) leverage as we do with the other funds. The downswings are still violent, but the outperformance is massive.
In other words, while we still want to buy at ideal prices, the pressure isn't as great for us to jump into BTZ at exactly the right moment.
A 8% discount to NAV versus a 6% five-year average is nothing to sneeze at.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever.
Disclosure: none

Orange background

Try Our AI Features

Explore what Daily8 AI can do for you:

Comments

No comments yet...

Related Articles

What The CPI Inflation Numbers Mean For The Future
What The CPI Inflation Numbers Mean For The Future

Forbes

time18 minutes ago

  • Forbes

What The CPI Inflation Numbers Mean For The Future

The Consumer Price Index numbers for May came out on Wednesday. The seasonally adjusted number was up 0.1% in May, a drop from April's 0.2%. except for March, it was the lowest monthly inflation figure since July 2024. Over the last 12 months, inflation was 2.4% before seasonal adjustment. There is volatility over time, but also a downward trend line, even if it hasn't dropped fast enough for people's tastes. Below is a graph from the Federal Reserve Bank of St. Louis, showing year-over-year comparisons. Year-over-year changes in the CPI Federal Reserve Bank of St. Louis The news was good, at least in theory and at a high level. At a more detailed look, perhaps not. Other issues — tariffs, rising deficit spending, and spending cuts for important common good activities — combine with inflation to create greater uncertainty in the near future and the potential for a recession. Here Are The CPI Details That Affect You CPI at the headline level sounds good. Details are, on the whole, more discouraging. Here are some product categories where inflation was much higher: All are necessities, if not for everyone, for many millions. Other items helped keep the headline inflation down: The moderating factors don't necessarily remove the burden of the items with greater inflation, depending on how households spend and experience inflation. Near Future Effects On Inflation 'Shelter and energy are going to keep the disinflation trend intact,' wrote Jamie Cox, managing partner for Harris Financial Group, in a note. 'Prices are moving down in two of the largest categories, so investors should expect further declines in inflation in the coming months. 'However, CPI remains above 2% and even though the tariff rates are going to be less than originally feared, after they are implemented, they will further increase the cost of goods,' wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a second note. 'Because of this and the tariff pause that's scheduled to be lifted next month, we are still cautious, but many of the risks that were present in early April, appear to be receding at this time.' As Oxford Economics noted, the May CPI data have been 'encouraging, but unlikely the new norm.' For example, the administration announced a temporary trade truce — again — with China following talks in London. This time, tariffs will be 55%. That's a blended number and includes 20% tariffs on fentanyl, a 10% reciprocal tariffs, and then an average 25% for tariffs already in place before this year, according to a MarketWatch report. The congressional spending bill is likely going to send spending and the deficit up, which will also provide inflationary pressure. While the headline numbers sound like a reprieve, it probably won't be ultimately.

Moderna Seeks Outside Investors to Fund Select Vaccine Trials
Moderna Seeks Outside Investors to Fund Select Vaccine Trials

Bloomberg

time39 minutes ago

  • Bloomberg

Moderna Seeks Outside Investors to Fund Select Vaccine Trials

Moderna Inc. is in discussions with large drugmakers and financial firms to get funding for some late-stage vaccine trials as it works to develop its product portfolio while cutting costs. 'We are very actively talking to potential partners right now,' Chief Executive Officer Stephane Bancel said Wednesday at the Goldman Sachs Annual Global Healthcare Conference. The discussions are with pharmaceutical companies and other types of financial partners, he said.

S&P 500 Gains and Losses Today: Nucor Stock Falls as US, Mexico Negotiate on Steel Tariffs
S&P 500 Gains and Losses Today: Nucor Stock Falls as US, Mexico Negotiate on Steel Tariffs

Yahoo

timean hour ago

  • Yahoo

S&P 500 Gains and Losses Today: Nucor Stock Falls as US, Mexico Negotiate on Steel Tariffs

The S&P 500 slipped 0.3% on Wednesday, June 11, as investors weighed softer-than-expected inflation data and progress on U.S.-China trade talks. Shares of Nucor and other steelmakers lost ground following reports that the U.S. and Mexico have discussed reducing or eliminating tariffs on steel imports up to a certain volume. GE Vernova shares advanced after BofA analysts boosted their price targets. The analysts highlighted expectations for strong growth in U.S. electricity U.S. equities indexes ended the midweek session slightly lower. Stocks failed to extend their rally even as the latest Consumer Price Index (CPI) report showed a lighter-than-expected uptick in inflation in May, while the U.S. and China announced a framework for implementing a trade deal. The S&P 500 traded in positive territory for much of the day but lost steam on Wednesday afternoon. It closed with a loss of 0.3%, snapping a streak of three straight winning sessions. The Nasdaq was down 0.5%, while the Dow finished just a point below Tuesday's closing level. After securing the S&P 500's top performance in the previous session, Intel (INTC) shares gave back most of their gains on Wednesday, tumbling 6.5% to record the steepest daily drop in the benchmark index. This week's volatility for Intel stock came as trade talks between the U.S. and China boosted hopes for less onerous semiconductor export restrictions. Meanwhile, the chipmaker remains in the midst of a major restructuring effort under CEO Lip-Bu Tan, who has been focused on cutting costs through workforce reductions, divestitures, and other initiatives since entering the role in March. Shares of steelmakers came under pressure following reports that the U.S. and Mexico are negotiating to scale back or cancel President Donald Trump's 50% tariff on steel imports up to a certain volume. The North American neighbors are reportedly exploring a quota system that would allow a specific amount of the metal to enter the U.S. from Mexico duty-free or at lower rates, with excess amounts subject to the full 50% levy. Nucor (NUE) shares lost 6.1%. Lockheed Martin (LMT) shares dropped 4.3% after reports indicated that the U.S. Department of Defense is cutting down on its orders for the aerospace and defense manufacturer's F-35 fighter jets. Delays involving a technological upgrade have hampered the finalization of contracts for the F-35. Warner Bros. Discovery (WBD) jumped 5%, climbing the most of any S&P 500 stock on Wednesday, as investors continue to evaluate the entertainment giant's recently announced plan to split its studio operations and TV business into two separate companies. The stock has been volatile since the announcement, and uncertainties about the strategy remain. Starbucks (SBUX) shares jolted 4.3% higher on Wednesday. The coffee giant announced the launch of Green Dot Assist, a virtual assistant powered by generative artificial intelligence (AI) that is designed to help baristas with in-store functions, from learning to make drinks to troubleshooting maintenance issues. The company's CEO also said that Starbucks would accelerate its rollout of an updated staffing model across its stores and noted that the company has garnered significant interest regarding a possible sale of its stake in its China business. Shares of GE Vernova (GEV), the energy technology company that spun off from General Electric in 2024, surged 3.9% after Bank of America boosted its price target on the stock. Analysts highlighted their expectations for growing electricity demand in the U.S. over the next 10 years. They noted that GE Vernova could be well-positioned to capitalize on its natural gas turbine market strength. BofA also pointed to upside potential for GE Vernova's electrification business, anticipating strong demand for grid reliability equipment. Broadcom (AVGO) shares gained 3.4%. In results released last week, the chipmaker reported record quarterly revenue, driven by a boom in AI semiconductors, prompting numerous analysts to raise their price targets on the stock. However, Broadcom issued a muted forecast for the current quarter, citing potential softness in its server storage, wireless, and industrial businesses, and its shares initially moved lower in the wake of the report. Despite these challenges, Broadcom expects AI revenue growth to remain robust, saying it could hit $5.1 billion in the fiscal third quarter. Read the original article on Investopedia

DOWNLOAD THE APP

Get Started Now: Download the App

Ready to dive into the world of global news and events? Download our app today from your preferred app store and start exploring.
app-storeplay-store