You may have noticed that lately, the media is pumping out more stories on how the US economy and stock markets are leading the world.
Well, it’s true. Today we’re going to get into a few reasons why that is. We’re also going to look at how us income investors can use a special kind of income play, closed-end funds (CEFs)—many of which yield north of 9%—to cash in on America’s runaway lead, boosting our dividends and setting ourselves up for 10% annualized returns, basically forever.
We’ll wrap with a real “nuts-and-bolts” view of the factors that go into the ongoing rise in US stocks—uncovering fundamentals that few investors stop to learn (but can help us immensely, especially when a 2022-style pullback tests our nerve).
Innovation, Efficiency, Capital Moves Power US Stocks Ahead
Just the latest stories on American financial exceptionalism to come across my desk lately include this one from Fortune magazine.
And another one from multibillionaire hedge fund mogul Ray Dalio’s firm, Bridgewater Associates, which says that America’s lead is likely to continue because “US companies are more innovative, more efficiently run, better at deploying capital and have a more shareholder-friendly orientation than their developed-world peers.”
That’s all true, and its why the S&P 500 (the go-to index fund for which is shown in orange below) has crushed its global cousins in the long run:
US Stocks Outrun the Rest of the World
As you can see, the S&P 500 index is up nearly 500% since 2011, as of this writing. That’s the year of the IPO on the Vanguard Total International Stock ETF (VXUS), which invests in the world’s major stock markets except for America. As you can also see, VXUS is up just 82.6% in that time.
So in other words, you’re taking on currency exposure, volatility and other risks for an annualized return of 4.4%. That’s less than what many high-yield savings accounts pay.
Not a great deal!
US-stock outperformance isn’t news to us at my CEF Insider service, by the way. Our portfolio of high-yield CEFs, which boasts a current yield of around 10% on average, has been benefiting from it for years.
In July 2017, for example, we bought the Adams Diversified Equity Fund (ADX), a US-focused CEF that yielded around 9% then and pays about the same now. It’s gone on to return 198% to us, including dividends, as of this writing, beating the S&P 500:
ADX Outruns SPY (and by Extension, the Rest of the World)
It all leads to an interesting question that few investors pause to consider: What’s driven the gains, in both the index and in funds like ADX?
Let’s look at 4 fundamental reasons why the prices of stocks—and our stock-focused CEFs—rise over time, and what we can expect from them in the long run (whether we see a pullback in 2025 or not).
#1 Rising Earnings to Shareholders
The first thing to consider here is that US firms have simply out-earned their counterparts globally. That’s the first part of what’s made US stocks rise in the long run.
To see how earnings play into stock prices, let’s look at Apple (AAPL), which realized $6.55 in earnings per share over the last 12 months—meaning each share is an economic claim on $6.55 worth of earnings Apple earns per year.
In other words, at around $244.00 a share, as of this writing, you can buy a piece of Apple that gets you about a 2.7% yield from your investment—that is, to get $6.55 in earnings, you have to pay $244.00 for that claim.
But of course, the company doesn’t actually pass over those earnings to shareholders directly. They mostly get reinvested in the firm (apart from the portion that goes into dividends and buybacks, of course). But this does mean that, if Apple doesn’t innovate, doesn’t expand market share and is able to maintain its current level of productivity, your shares should rise by 2.7% per year.
If we take the total earnings of the S&P 500 and divide them by the cost to purchase all those shares, we see that you can get a 3.3% yield from US firms. In other words, if nothing else changes, stocks should rise organically by 3.3% a year.
#2 Inflation—the Good Kind
Professional investors often call stocks an inflation hedge because when prices go up, companies’ revenue does, too—even if this inflation doesn’t necessarily make the firm any more profitable. This rising revenue should make their shares rise, as well.
For instance, imagine ABC Snacks produces potato chips for $2 a bag, selling 100 million bags a year for $200 million in revenue. After costs, the company earns $20 million in profit—a 10% margin. Let’s say ABC Snacks has 10 million shares, so $2 of profit accrues to each share.
Now let’s say inflation causes a bag of chips to rise to $2.10 per bag, with profit margins still being 10%. Now the company is earning $21 million in profit for that same 100 million bags of sales, and $2.10 of profit accrues to each share.
No one is actually financially better off here—inflation has caused all prices to rise, after all. But the key point is that the stocks will naturally rise to account for inflation. So, with US inflation at about 2.5% now, we should expect stocks to rise by about 2.5% a year.
#3 Risk Premiums and Interest Rates
Of course, stocks can fall in the short term, like they did in 2022. That’s the risk entailed in stock investing, and that risk needs to be paid back with reward.
As a result, common stocks typically have about a 2% extra return baked in to compensate for this volatility. This “risk premium” has been observed in stocks for well over a century.
#4 Productivity Growth
Finally, we see the economy grow because of population growth and technological innovation. These things result in more productivity, which rises over the long term by about 2% on average. Thus, in addition to the returns above, stocks should also rise by about 2% to account for improvements in tech, a better-trained workforce and so on.
Putting It All Together
Add all of these together and you’ll see that stocks should rise by about 9.8% per year on average over the long haul. And that is, indeed, what we see throughout history.
Big Gains Over the Long Haul
Going back to the late 1980s, the S&P 500 has returned 10.4% per year on average, pretty close to that 9.8% figure.
So yes, we can expect stocks to rise in the years ahead—and we should, by about 10% annually. And with a CEF investing in American equities like ADX, we’ll get that mostly in the form of cash, thanks to the fund’s outsized yield.
That’s another big advantage over investors who buy, say, a 1.2%-yielding S&P 500 index fund like the popular SPDR S&P 500 ETF Trust (SPY). If those investors want to tap their SPY holding for cash, they’ll be forced to sell, potentially into a downturn, reducing their gain potential in the future. With a CEF, we can simply collect our dividends as we wait for markets to turn north again.
5 CEFs With Monster 9.8% Yields ($1,633 in Monthly Dividends on Every $200K)
As we’ve seen, US stocks are the undisputed leaders of global markets, and we can “translate” their strong gains into regular dividend payouts through CEFs like ADX. And when you add these funds’ price gains to their high dividend payouts, you get total returns that regularly beat the S&P 500, as ADX has.
Here’s what else most people don’t realize about these 9%+ paying CEFs: Many of them pay dividends monthly.
Nine-percent dividends that drop into our accounts right in line with our bills!? That’s $817 a month on every $100K invested. And $1,633 monthly on every $200K.
We’re interested!
I’ve sifted through all the monthly paying CEFs out there to zero in on the best of the best. And I’ve put them all into a free Special Report I want to share with you now.
The 5 monthly income funds inside this exclusive bulletin yield 9.8% on average, and they come from across the market, holding not just blue-chip US stocks but also the best corporate bonds, tech stocks, real estate investment trusts (REITs) and more.
That diversification gives you an extra layer of safety, so you can collect your 9.8% yearly dividends (paid monthly) in peace.
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