Barrels of oil against the backdrop of American dollars. Oil for sale. Oil market.getty
Let's take these 104% profits and book them today. This winner will be sold and we'll then look at a 9.3% dividend which could really skyrocket in 2023. This high-quality fund trades at a 17% discount on fair value. There's more in this bargain bin! A 5.9% payer is also available for just 83c per dollar, which is 17% less than the original. We'll be discussing these extremely cheap dividends shortly. First, the winner. Remember how we 'pounded on the table' Exxon Mobil (XOM in April 2021. We were correct. The payer at 6.1% was just too low! We missed the upside target. We had 61% in mind. In reality, XOM delivered 104% total returns.
Energy stocks were widely loathed in April 2021 when Exxon was flipped bullish. Mainstream investors believed that XOM's dividend could be at risk of a leak. We knew better than to take this "common knowledge" at face value. It is not always easy to buy out-of-favor stock. It feels safer to follow the crowd when you're investing. We know that the best way to make real profits is to ignore popular opinion. XOM's payout was under threat according to 'Basic" dividend investors. Activist investors were grabbing Board positions, and XOM’s debt has ballooned since the beginning of 2019. The company seemed to be borrowing cash to pay dividends. It was not a great look. It was for a few quarters. However, our'second-level research showed that XOM shares were likely to reach a multi-year low and its dividend was secure. Two reasons were enough to feel confident: Oil prices were rising. We believed they would continue climbing as the black goo continued its 'Crash 'n' Rally' pattern. That is exactly what happened. XOM's profits have risen due to higher energy prices. XOM started paying down its long-term debt because of improved cash flow. This was a strong indicator that the dividend was safe.
Firms such as XOM will do whatever it takes to keep their dividends from being cut, even if that means taking out debt to pay their bills. Yes, the management did manage to pay off some of their debts during the oil price collapse. However, a quick recovery in Texas tea prices could save the day and swiftly reverse the need to borrow XOM.
A decline in debt was a sign that things were improving. It's a coil spring if the company has enough cash to operate its business, pay down the debt and fund the dividend, and to buy back shares.
This would soon reflect in XOM’s share price. Stock market investors are rewarded for placing bets before the outcome is known to the rest. Contrarian investing is profitable because we buy before the fog clears. If we go with the herd, then we share the smaller profits.
Why not book the gain? Long-term, I remain wildly bullish about energy.
I am. But I am focusing on XOM as it is levating higher despite lower crude oil prices. You can see the difference between XOM's (+79%) and Texas tea's (-4%) performance year-to-date.
XOM has been considered the 'hot pair'. It could cool down for two reasons. XOM's yield has fallen to 3.5%, which is a side effect of a rising stock price. These energy stocks are very popular right now, whereas they were hated back in April 2021.
This is the perfect time to book these 104% profits, if you have them from our April 2021 conference call.
My thoughtful contrarian, I can hear you now. "China will reopen. XOM has bought back $50 billion worth of stock. Aren't we still looking for energy exposure?
Yes, we do. We're second-level thinkers and will demand a discount. Plus, a larger dividend! We're looking at the best closed-end funds on the planet (CEFs).
CEFs are a great investment because they pay big dividends. CEFs often fall into the bargain bin.
CEFs fall with a thud when markets plummet, as they have done for the whole year. CEF owners panic and sell at all prices, even as low as 83c per dollar.
These bargains are not available to professional investors. People with millions or millions of dollars will often put their cash into the liquid S&P 500.
For a dollar, we can purchase the most affordable funds on the planet.
MainStay CBRE Global Infrastructure Megatrends Fund, (MEGI) yields 9.3%. Yes, 9.3%.
MEGI holds some of our favourite energy dividends. Contrarian Income Report readers will be able to recognize ONEOK and The Williams Companies (WMB). They'll also smile.
These two energy blue chips have risen 168% and 89%, respectively, in our CIR portfolio!
MEGI launched before the bear market, meaning its track record was in trouble early on. This is why it did not appear on any screeners. It trades at 17% below its net asset value (NAV) because of this stealth.
PIMCO Energy and Tactical Credit Opps is a great way to take advantage of the energy pullback. NRGX has a mix of income-producing bonds and stocks that can take advantage of high energy prices.
Note that I did not say higher. This is because energy is likely stay elevated in its ongoing multi-year crash ’n rally pattern. First, oil prices crash (see March 2020 and April 2020). Energy producers then scramble for ways to reduce costs. They reduce production. Because it does, the economy recovers. The energy demand increases. Then, the supply of oil is insufficient! The price of oil starts to rise. It takes many years to drill and explore, so supply is not as plentiful as demand. The price remains high.
There are years left, and perhaps the remainder of 2020s, for energy supply to stay tight. Even a slight recession will not stop this bull.
There are many ways to win when you have a CEF that is as cheap as NRGX. Collect the 5.9% dividend that high energy prices provide. Over time, enjoy rising NAV. Profit when the discount window is at 17%
CEFs in the energy sector may eventually turn to premiums as the market for energy continues to grow. It sounds crazy until you consider the fact that many PIMCO funds are traded for more than their underlying assets. As I write, PIMCO CA Municipal Income(PCQ) commands 51% 'gratuity. My high-earning neighbours are paying $1.51 per $1 of California munis - the cost of tax relief for a high-tax state!
We don't want to pay $1.51 per $1 of income. "Eighty-three Cents" sounds better. We're also catching energy from a dip.
Contrarian Outlook's chief investment strategist is Brett Owens. Get his latest report, Your Early Retirement Portfolio: Massive Dividends Every Month for Ever! to get more income ideas.