Your Best Buy For 7.2% Dividends (And Upside) In A Wild Market

What if there was a way you could tap this market correction to grab the biggest S&P 500 stocks cheap—all while hedging your downside and getting a 7.2% dividend yield?

It’s not only possible, but you can do it in one single buy. More on that in a moment.

First, I’m pounding the table on stocks—and in particular funds like the one I’ll show you shortly—for one reason: there’s a huge disconnect between the drop in the market that we’ve seen lately …

… and what S&P 500 companies are telling us.

And that is that far more firms than expected are crushing the Street’s forecasts. And better yet, revenue—the lifeblood of profits and the best measure of demand we have—is soaring: up 4.1% from a year ago.

In short, S&P 500 earnings statements are just fine, thank you very much.

Your 1-Click Opportunity to Cash in on Fear

We’re going to tap overhyped fears about profits to grab ourselves a 7.2% dividend (with upside) using a key strategy many hedge funds use in markets like this.

It’s called “positive carry income capture,” but don’t be thrown by the Wall Street–speak; it’s simple: you buy a collection of stocks and draw an income stream from them—then use that income to reinvest during downturns like this one.

This is where the Nuveen S&P 500 Buy-Write Income Fund (BXMX) comes in, because this sturdy closed-end fund (CEF) carries out this strategy for us.

With a 7.2% yield and a 2.2% discount to net asset value (NAV, or the per-share market value of the stocks in its portfolio), BXMX is worth a close look—especially because markets are volatile, and that’s precisely what this fund, known as a “covered-call fund,” is built for.

More Panic, More Cash

This chart shows the S&P 500 volatility index (VIX) in orange and BXMX’s income stream in blue.

What’s the VIX? Imagine a barometer of the total fear in the market, measured by how much investors are willing to pay to “insure” their stock portfolios. That’s the VIX.

When that barometer goes up, tensions are high—but notice how those moments of elevated tension also mean more income for BXMX? Rising market fears mean a payout raise for BXMX holders.

The way this works is simple. BXMX has two functions: the first is holding shares in S&P 500 companies, such as Microsoft (MSFT), Apple (AAPL) and Visa (V).

The second is selling “insurance” on the S&P 500 to investors. These funds do this is by selling call options (a kind of contract where the fund agrees to sell shares at a specific price) that limit the fund’s downside while helping short sellers limit their own losses. When those investors pay more for insurance, BXMX gets more cash, which it then hands over to investors.

There’s a tax advantage to BXMX, as well.

The cash the fund gets from selling this insurance is typically considered capital gains if investors do this individually, but BXMX can structure its payouts so that this cash is considered “return of capital,” which means it’s not taxed for many Americans. So far for 2019, 83% of BXMX’s dividend has been classified as return of capital, so is tax-free for a lot of people.

(Many folks think that return of capital is simply the fund company returning your cash to you in the form of a dividend, but that’s false. I’ve written an in-depth article busting that and other myths about return of capital that you can read when you click here.)

Beyond the tax benefits, the appeal of BXMX is twofold: because it takes advantage of investor fears by selling insurance during downturns, its income stream is over three times greater than what you’d get from an S&P 500 index fund. This means that moments of higher volatility, like what we’ve seen recently, are times to buy in and take advantage of the market’s woes.

The best part? Investors seem to have not noticed the power of BXMX’s income potential.

BXMX’s Big Dividend Flies Below the Radar

Even when the market sees a spike in volatility (in orange), BXMX’s discount to NAV (in blue) stays rigidly range-bound, despite the fact that this tax-advantaged income stream should be attracting investors left and right. This is a mispricing income-seekers like us can take advantage of.

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 8.5% Dividends.”

Disclosure: none

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