Unlocking a 9.2% Yield: A Contrarian Approach to International Income Investing
Income investors often overlook the potential of international stocks, missing out on opportunities to enhance returns and mitigate risk. While the US market remains a cornerstone of many portfolios, diversifying into international markets, particularly through high-yield closed-end funds (CEFs), can unlock significant income streams and offer a strategic advantage. This article explores a contrarian approach to international income investing, focusing on the potential of Chinese stocks and a broader international CEF strategy to potentially achieve a 9.2% yield.
China’s Stimulus Package: A Catalyst for Growth or a False Dawn?
China’s recent announcement of a new stimulus package has sparked optimism among some investors, drawing parallels to the US quantitative easing programs following the 2008 financial crisis and the 2020 pandemic. While the details of the Chinese stimulus remain unclear, the potential for a similar positive impact on the stock market is enticing. Historically, US stocks experienced significant gains following QE programs, raising the question of whether Chinese stocks could follow a similar trajectory. The substantial decline in Chinese stocks since their 2021 peak presents a tempting entry point for contrarian investors. However, previous attempts by China to stimulate its economy have yielded mixed results. A 2016 stimulus effort produced a short-term rally but ultimately failed to deliver sustained long-term growth. This historical context calls for cautious optimism and a nuanced approach to investing in Chinese equities.
Navigating the Chinese Market: CEFs and the Discount Dilemma
Closed-end funds offer a unique avenue to access Chinese stocks, often trading at a discount to their net asset value (NAV). The China Fund (CHN), for example, currently trades at a significant discount, potentially offering an even more attractive entry point. However, the persistent discount, despite recent market optimism, raises concerns. While CHN has outperformed the broader Chinese market index, its long-term returns remain modest, highlighting the challenges of investing in a government-controlled economy. While the discount may seem appealing, investors should carefully consider the historical performance and inherent risks associated with Chinese equities.
Diversification Beyond China: A 9.2% Yielding International Alternative
While the potential of Chinese stocks remains a topic of debate, diversifying into broader international markets offers a compelling alternative. The BlackRock Enhanced International Dividend Trust (BGY) exemplifies this approach, boasting a consistent track record and a high dividend yield. Unlike CHN, which focuses solely on Chinese equities, BGY provides exposure to a diversified portfolio of international stocks, mitigating the risks associated with a single-country focus. Its performance over the past five years has significantly outpaced both CHN and the Chinese market index, demonstrating the benefits of diversification. Furthermore, BGY’s recent dividend hike has pushed its annualized yield to an impressive 9.2%, offering investors a substantial income stream.
A Dynamic Rebalancing Strategy: Maximizing Income and Mitigating Risk
Combining international CEFs like BGY with US-focused funds like the Liberty All-Star Equity Fund (USA) allows for a dynamic rebalancing strategy. This approach leverages the high dividend yields of both funds to strategically allocate capital between US and international markets. When US assets decline, the income generated from BGY can be reinvested in USA, capitalizing on potential market dips. Conversely, when international markets underperform, USA’s distributions can be used to increase exposure to overseas stocks at potentially discounted prices. This dynamic rebalancing strategy maximizes diversification, enhances income generation, and provides a tactical approach to navigating market fluctuations.
The Advantages of CEFs: Income, Diversification, and Tactical Flexibility
The use of high-yield CEFs in this strategy offers several distinct advantages over traditional ETFs. CEFs often provide higher dividend yields than ETFs, providing a substantial income stream for reinvestment or distribution. Their closed-end structure allows for active management and the potential to capture market inefficiencies. Furthermore, the ability to reinvest dividends from one CEF into another provides tactical flexibility, allowing investors to capitalize on market movements without the need to sell shares and time the market. This dynamic approach can enhance returns and mitigate risk compared to passively holding low-yielding ETFs.
