Owning a healthy mix of stocks in the consumer staples and consumer discretionary sectors makes sense, suggests Michael Foster, a speciality in closed-end funds and the editor of Contrarian Outlook.
This especially makes sense so these days, as staples help fortify our investments in a downturn, while discretionary firms’ low valuations aren’t accounting for the billions of extra cash consumers have, thanks to lower gas prices, recent wage gains and leftover pandemic savings.
You could get exposure to both sectors by picking up two of the main ETFs benchmarking these sectors, the iShares US Consumer Discretionary ETF (IYC) and iShares US Consumer Staples ETF (IYK).
Both are down for the year, with IYK holding up better as staples attract defensive-minded investors as recession worries rise. Problem is, you’ll be counting on price gains alone for your return, as IYC yields a mere 0.6%, and IYK isn’t much better, at 1.8%.
Luckily there’s a better option that gives us “all in one” exposure to the US economy and pays us a rich 6.6% dividend. That’s 11 times the payout on IYC and nearly four times IYK’s 1.8% dividend. It also means we’re getting a large slice of our yearly return in cash.
That would be a well-established closed-end fund (CEF) called the Gabelli Dividend Income Trust (GDV). A look at its top-10 holdings reveals a host of companies that profit from higher spending on discretionary goods and staples, such as online-advertising play Alphabet (GOOGL), Mastercard (MA), Microsoft (MSFT), Sony (SNY) and American Express (AXP), as well as food maker Mondelez International (MDLZ).
In addition, we get the management expertise of Mario Gabelli, a value-investing guru who has more than doubled his investors’ money in the last decade, with a 124% return. He’s also boosted the fund’s dividend by 37.5%, with the odd special payout along the way. Best of all, this CEF pays dividends every month, in line with our bills.
This kind of active management is crucial for spotting bargains (and avoiding weak businesses and sectors) in the panicked market we’re in—and algorithm-driven ETFs can’t match it.
Now let’s talk about the discount. Thanks to the recent selloff, GDV’s discount to net asset value (NAV, or the difference between its portfolio value and the fund’s price on the open market) is 13% as I write this, not far off its 2022 lows. This means we’re essentially buying this reliable fund for just 87 cents on the dollar.
So if you’re considering adding consumer staple, discretionary or just plain S&P 500 exposure to your portfolio, GDV is definitely worth a look. Its deep discount, stable monthly dividend and active management are all advantages you’ll never get in an ETF.
