This $20 Stock Yields 7.6%, Trades At 7% Discount

Checking price of item in supermarket aisle

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I staggered out of my Uber into a sea of orange. My next challenge—a monolithic 100,119-seat stadium—loomed in the distance.

Ever regret something instantly? That was me. Dumb decision. Zero chance your dividend guy could make it in and out of that sports palace.

Fortunately, as if sent from above, my new hype man walked by.

“That’s dedication!” An orange-clad Texas Longhorn fan and fellow father pointed at my CAM walker boot. Which, of course, housed my relatively newly-reconnected Achilles. Which was quickly appreciated outside Darrell K Royal Texas Memorial Stadium.

“Hardcore, man,” my new BFF reiterated. “I respect that.”

I tapped my chest and pointed back at him. Thanks my man as my limp improved ever so slightly en route into the stadium for the 11am kickoff.

What the heck were we doing here? My cousin-in-law had a wedding in town. Which just so happened to coincide with the Texas v. Kansas State football game. Which is where my brother-in-law went to school. And he needed a buddy for the game. So…

We got to the seats. Or metal benches. Regardless, I didn’t move from my spot for the next four hours, for fear of a “flat tire” that would necessitate a gurney out of the stadium.

A Saturday in Texas and I couldn’t stop thinking about the Nasdaq. Seriously, this stuff follows me around:

QQQ Advertisement

Contrarian Outlook

I’m sure this banner for Invesco QQQ (QQQ), the popular Nasdaq ETF, is there all season. But I was intrigued because I kind of like the QQQs right now.

Technology stocks trade as “long duration” assets. Which means, ironically, they move with bonds. Reason is, Wall Street analysts roughly know how much money Apple (AAPL) and Microsoft (MSFT) will make over the next five years.

What the suits don’t know is the value of that money today. With interest rates moving all over the place, the discount rate being applied to future earnings is a moving target.

This volatility presents opportunity. Long rates have likely topped, at least in the near term. Last week was a great example. We saw headlines that 30-year US Treasuries had a “disastrous” auction. Yet, by the end of the week, the 30-year rate was lower than it started the week. (Reminding us, yet again, why we research beyond the often-misleading headlines.)

If rates have topped for now, then tech stocks (the QQQs, if you will) have likely bottomed for now. Which makes the Longhorn endzone banner an interesting trade.

But we income investors can do better. QQQ spends the marketing money, but Nuveen Nasdaq 100 Dynamic Overwrite (QQQX) pays more. In fact, we can get 7% more yield simply by adding an X!

QQQX is a closed-end fund (CEF) that buys tech stocks and writes covered calls against the positions for extra income. This strategy caps upside, but it generates more cash flow than buying and holding QQQ. In this uncertain world, this 7.6% dividend with a nearby floor (thanks to falling rates) is attractive.

And the bargain gets even better because, as a CEF, QQQX can trade at a discount to its net asset value (NAV). This tends to happen after market panics, like the flip out we saw in September and October.

As I write, QQQX is worth $23.85. That’s its NAV. But we can buy the fund for $2+ off, just $21.71. This represents a sweet 7% discount window that, for the moment, is wide open:

Income investors who like the tech thesis can also consider Global X Nasdaq 100 Covered Call (QYLD). This is an ETF, like QQQ. While QYLD doesn’t have a big marketing budget, the fund does dish a huge dividend—11.8%.

We won’t get a deal on QYLD. As an ETF, it always trades around par (fair) value. Also, QYLD is a bit lazy as it writes calls on the Nasdaq index itself, versus the individual stock positions as QQQX does. Which results in lower option premiums.

Tech Fund Comparison

Contrarian Outlook

QYLD pushes most of its cash flow into its dividend. QQQX has more potential for price gains as its discount window closes.

Long-time Contrarian Income Report subscribers will recall QQQX fondly. Years back, we held the fund for 15 months and flipped it for fast 42% returns. I’m not sure we have a 15-month trade here, but over the next two or three months QQQX sure looks poised to pop.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.

Disclosure: none