Supersize Those Yields

Mastercard (MA) is a near-perfect dividend stock. Its payout is always climbing, having nearly doubled over the last five years. (MA shareholders, you can thank every business that accepts Mastercard for your “pennies on every dollar” rake.)

Tap, tap, tap. Remember cash? Me neither. Another 2020 casualty, with Mastercard making a few dimes or dollars on every plastic transaction.

The cashless trend has been in motion for years. But international growth prospects remain huge. Just a few years ago, 80%+ of transactions in Spain, Italy and even tech-savvy Japan were in cash.

We expect more dividend hikes as more cash turns to plastic. Or skips plastic entirely and goes straight to e-transfers. Mastercard and close cousin Visa (V) nab a nice piece of that action, too.

The only chink in MA’s armor? Everyone knows it is a dynamic dividend stock. So it only yields 0.5%. Investors keep bidding it higher, knowing that the next dividend raise is just around the corner.

So, the compounding of those hikes makes MA a great stock for our kids and grandkids. You and I, however, don’t have the time to wait for 0.5% to grow. And $2,500 on a $500K investment simply won’t get it done.

Let’s instead consider top-notch closed-end fund (CEF) Gabelli Dividend & Income Trust (GDV), managed by legendary value investor Mario Gabelli.

Mastercard is one of Gabelli’s largest holdings. But we income investors would prefer GDV because it boasts a healthy dividend right around 6.4%, paid monthly, nearly 13 times what Mastercard pays (and this is low in CEF-land; other funds, like the next one we’ll talk about, pay nearly double that).

And as I write this, thanks to the conservative folks who buy CEFs, we have a rare opportunity to buy Mario’s portfolio for just 89 cents on the dollar.

Yup, GDV trades at an 11% discount to its net asset value, or NAV. It’s a way to boost MA’s payout and snag a discount, too.

Where does this discount come from?

CEFs are like their mutual fund cousins, with one exception: they have fixed pools of shares, so they can (and do) trade higher and lower than their NAVs, or “fair” values (the value of their holdings minus any debt).

As contrarians, we can step in when they are temporarily out of favor, like after a pullback, when liquidity is low, and buy them at generous discounts.

GDV holds more blue-chip dividend payers alongside MA, such as American Express (AXP), Microsoft (MSFT) and JPMorgan Chase & Co. (JPM). And with GDV, we have an opportunity to purchase them at an 11% discount.