Are US stocks set to lose out to the rest of the world forever? That’s what the press would have us believe. But we, contrarian dividend investors, are looking at this from a different angle.
Our strategy? Buy America when the rest of the world is selling.
It’s worked before, and we have every reason to believe it will work now, too. So let’s talk about it—and the best way to position ourselves for US stocks’ next leg up, with a healthy dividend payout on the side.
Press Panics, US Stocks Bounce
It’s funny, but not surprising, that the moment “sell America” became a headline earlier this year, US stocks started to recover. That said, they are still behind the rest of the world, as we can see by the performance of a popular S&P 500 index fund (in purple below) compared to the Vanguard FTSE All-World ex-US ETF (NYSE:), in orange.
US Stocks Dip, Start to Bounce Back
Note that both US and global stocks fell about the same amount when the Trump administration announced big global tariffs on April 2. But global stocks recovered more quickly in the following days. And then, last week, US stocks started to catch up.
History tells us that they’re likely to do much more than catch up in the long run.
US Stocks Outpace the Rest of the World Over Time
Going back to VEU’s IPO in 2007, the S&P 500 has returned 9.9% per year on average, as of this writing, while VEU returned just 3.9% annualized.
This shows why buying US stocks when they lag is a winning move in the long run. We can see that more clearly when we go back to the last time the world soured on US stocks in favor of foreign alternatives, which was a bit over a year ago in February 2024.
Back then, Reuters wrote, “Investors dumped US shares, bought China in week to Wednesday.” At the time, Chinese stocks—shown in blue below by the performance of the iShares MSCI China ETF (NASDAQ:)—were more than doubling their US cousins (in purple), which were themselves lagging global stocks (in orange) by a bit.
The Last Time America Disappointed
As we can see below by looking at Chinese stocks, that country’s markets held their value for the rest of 2024, but US stocks surpassed those of the rest of the world and started to close the gap with Chinese stocks by the end of the year.
US Stocks Take Off, Close in on Chinese Equities
And in the longer run, Chinese stocks trail. If we go back to MCHI’s IPO in 2011, we see that it has badly lagged US and global stocks, being almost flat:
US Still Leads for Long-Term Wealth Creation
So, time and time again we see the same pattern:
- When US stocks are underperforming, we get a chance to buy them at a discount relative to their global peers.
- The underperformance might last for a while, but over timespans lasting decades or longer, American assets outperform.
For us long-term investors, then, it makes sense to take advantage of the recent lag in US stocks to buy—and position ourselves for a bigger return over the long haul. One of the best ways to do so is through a closed-end fund (CEF) called the Liberty All Star Equity Fund (NYSE:), which yields a rich 9.5% as I write this.
USA holds well-known US large caps in a diversified portfolio, with Microsoft (NASDAQ:), Amazon.com (NASDAQ:), Visa (NYSE:), Capital One (NYSE:) and many others as top positions.
The fund also focuses on firms with strong cash flow, “moats” in their business models that help them fend off competitors, and histories of strong returns. It also “translates” those profits into that huge income stream for investors who buy now.
Moreover, USA (in blue below) has outrun global and Chinese stocks in the last decade.
USA Beats China and the Rest of the World
USA’s big dividend didn’t just hold steady over this period, it grew, as the fund pays out a percentage of its net asset value (NAV, or the value of its underlying portfolio) as dividends.
USA’s Payouts Grow
By investing in USA, we’re getting a huge and reliable income stream that stands the test of time. And now that the market has sold off, there’s an opportunity to buy before we go back to the norm of American outperformance.
Which brings me to the fund’s discount to NAV: As I write this, USA trades around par. That makes it a good trade now. But if you want to maximize the gains you collect in addition to that huge 9.5% dividend, it could pay to wait for the next dip—and the chance to buy at a discount.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, “7 Great Dividend Growth Stocks for a Secure Retirement.”
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