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It looks like 2024 will end with a big gain for investors in US stocks, with the S&P 500 up 28% year-to-date, even better than my (admittedly optimistic) expectations: I saw a roughly 15% gain for the S&P 500 going into the year.
If this gain holds, 2024 will go down as one of the best years in the last 20, with only 2013 and 2019 doing (just slightly) better.
However, unlike those years, the momentum isn’t coming mainly from tech, with the benchmark Technology Select Sector SPDR ETF (XLK) actually trailing the market, with a 24.5% return year-to-date, as of this writing.
That’s a good sign because it suggests that AI darlings like NVIDIA (NVDA) aren’t driving the market to irrational heights. Instead, this looks like a strong fundamental recovery after 2022’s selloff. Since that selloff was mainly driven by speculation about a recession that never happened, the 2024 bounce makes sense.
Considering International Stocks? Prioritize Discounts and 8%+ Dividends
Still, if you’re mainly holding US stocks, you might be wondering if, after all these gains, now is a good time to focus more on foreign shares. We actually discussed one strategy for doing so through our favorite closed-end funds (CEFs) in last Thursday’s article.
The chart below lends weight to this idea. Look at how the benchmark S&P 500 index fund (in purple) has done compared to the iShares Core MSCI Total International Stock ETF (IXUS), in orange. IXUS tracks global stocks, excluding the US:
IXUS Total Returns
Ycharts
Global stocks’ lag suggests it’s a good time to go into them. Problem is, this could be said for just about any given time since IXUS’s IPO over a decade ago. The fund (in orange below) has badly trailed the S&P 500 ever since.
SPY Outperforms
Ycharts
The reason behind this gap makes sense if you think about it: US companies are generally more profitable than their overseas cousins and, as a result, have attracted higher prices. This isn’t a 2024 story—it goes back nearly half a century, as this chart from Goldman Sachs shows.
US Stocks Soar
Goldman Sachs
The takeaway here is that foreign stocks—at least if they’re bought individually or through an ETF—are at best a short-term investment. But the calculus changes somewhat when you buy them through a CEF, due to two things:
The tendency for many CEFs to trade at discounts to net asset value (NAV, or the value of their underlying holdings).
CEFs’ high dividends (which average around 8% today).
When an international CEF trades at a deep enough discount, we can ride that discount as it closes, propelling the fund’s price along with it. And we’ll collect those high dividends as that happens.
We can see that in the BlackRock Enhanced International Dividend Trust (BGY), a holding in our CEF Insider service that we also discussed in last Thursday’s article.
Since the start of 2024, BGY’s discount has shrunk from around 15% to 9% as I write this, helping drive a 13.5% total return. And with BGY yielding 9.1% now, thanks in part to a recently announced dividend hike, most of this return has come as dividend cash.
So with discounted CEFs like BGY, then, buying international can make some sense, since you can get these funds’ assets at a discount and collect their outsized income streams while you wait for that discount to disappear.
(Though we still have to be careful given global stocks’ long-term underperformance—with BGY’s discount narrowing, we are moving closer to shifting it to a “hold” form a “buy” in our portfolio. Then perhaps we’ll sell and take profits).
That closing discount gives a fund like BGY a big advantage over an international ETF like the iShares MSCI EAFE ETF (EFA), which doesn’t get the “discount booster” a marked-down CEF does—and saddles us with a mere 2.9% dividend.
We can see the difference these things make when we stack up the year-to-date total return of our CEF, BGY (in orange), with EFA (in purple).
BGY Outperforms
Ycharts
But our international-CEF exception aside, we continue to focus mainly on US-based stocks (and US-based CEFs) in CEF Insider. We can see why in the performance of the Adams Diversified Equity Fund (ADX), a holding in our portfolio that’s topped the S&P 500 with a 30.6% year-to-date return.
The fund holds many US blue chips we all know well: Microsoft (MSFT), JPMorgan Chase & Co. (JPM) and Visa (V) among them. It trades at an 11.4% discount.
The best part? Nearly half of the fund’s return came as dividends, thanks to ADX’s high yield: 8.1% as I write this.
This is not easy for ADX’s management, investing as they are in a relatively volatile asset class, because they need to maintain a high cash outflow while still staying in the market. But ADX has a long history of sending high payouts to investors—and a long history in general: the fund was founded back in 1929.
The bottom line? For income and for long-term performance, ADX is a clear winner. And second, any long-term investment outside the US should be handled with care and generally shorter term, with deep-discounted, and high-yielding, CEFs playing a role.
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 Steady 8.6% Dividends.”
Disclosure: none
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Publish date : 2024-12-16 23:38:00
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