This 10.4% Dividend Is The Ultimate Contrarian Play On Tariffs

The Tariff Trap: A Misconception About Inflation and Interest Rates

In a world where “common wisdom” often dictates market sentiment, contrarians like us know that it’s essential to dig deeper into the narratives that dominate the headlines. Today, we’re focusing on a widely held belief that has gained traction in recent months: the idea that tariffs will inevitably lead to a spike in interest rates. While this notion is repeated frequently, it’s based on a flawed understanding of how tariffs actually impact the economy. In this article, we’ll explore why this belief is misguided and highlight a smart investment opportunity that contrarians can capitalize on.

Tariffs Here, Tariffs There: Understanding the Current Landscape

Tariffs have indeed become a defining feature of the current economic landscape. President Donald Trump recently imposed a 10% levy on Chinese exports to the U.S., with liquefied natural gas and certain types of coal facing an even higher 15% tariff. Canada and Mexico, meanwhile, secured a 30-day reprieve from the 25% tariffs threatened by the Trump administration after reaching border-security agreements. Make no mistake, this is not a one-off event. Trump has been advocating for tariffs since as far back as 1989, when he proposed a 15% to 20% tariff on imports from Japan. Just last week, he announced plans to impose “reciprocal tariffs” on multiple nations, aiming to match the tariffs they apply to U.S. goods.

The logical assumption here is that tariffs will lead to higher inflation, as imported goods become more expensive for U.S. consumers. Higher inflation, in turn, is expected to drive up interest rates. But is this really the case? To answer this, we can look to the bond market, which provides a real-time gauge of investor sentiment regarding inflation and interest rates.

The Bond Market Shrugs: A Contrarian Perspective on Tariffs and Inflation

If the bond market were genuinely concerned about tariffs causing inflation, we would expect the yield on the 10-year Treasury note—a benchmark for interest rates on loans for businesses and consumers—to rise significantly. Yet, the opposite has been happening. Over the past year, as Trump’s re-election prospects improved and ultimately became a reality, the 10-year Treasury yield has remained surprisingly subdued. In fact, every time it approaches the 5% mark, it retreats again. This suggests that the bond market is not buying the narrative that tariffs will lead to runaway inflation.

Why is this the case? Research from the Centre for Economic Policy Research sheds light on the matter. Contrary to popular belief, tariffs do not necessarily boost inflation. The reason lies in the underlying economic conditions required for inflation to rise. Inflation depends on a “hot” economy, but tariffs tend to act as a short-term drag on growth, creating headwinds that counteract inflationary pressures. The Financial Times reached a similar conclusion, noting that while tariffs can compress company margins due to higher costs and wage pressures, these effects are often absorbed by firms and their shareholders rather than being passed on to consumers.

This creates a unique opportunity for contrarian investors. With the bond market unduly pessimistic about tariffs and inflation, we can capitalize on undervalued bonds that offer attractive yields.

A Two-Part Strategy for Bond Buying (And One Ticker to Put It to Work)

When it comes to boosting bond exposure in our portfolio, we employ a two-part strategy designed to maximize returns while minimizing risk. First, we look below the investment-grade line, where the best bargains often lie. This is because institutional investors like pension funds are restricted from buying non-investment-grade bonds, leaving more room for individual investors to snap up undervalued opportunities.

Second, we prefer to invest through closed-end funds (CEFs). These funds offer a number of advantages, including high dividend yields, expert management, and the potential to buy into bond holdings at a discount. By focusing on CEFs, we ensure that the majority of our returns come in the form of safe, recurring dividend cash—ideal for income-focused investors.

With these principles in mind, the DoubleLine Income Solutions Fund (DSL) stands out as a compelling contrarian play. Managed by the legendary “Bond God,” Jeffrey Gundlach, DSL offers a whopping 10.4% dividend yield, paid monthly. Since we first added DSL to our portfolio in April 2016, it has delivered an impressive 84.4% return, outperforming even the SPDR Bloomberg High Yield Bond ETF (JNK), a popular benchmark for corporate bonds.

Why DSL? Unlocking the Potential of Below-Investment-Grade Bonds

DSL’s success can be attributed to its willingness to venture into less crowded areas of the bond market. A full 75.5% of its portfolio is allocated to below-investment-grade bonds, with an additional 6.2% in unrated securities. This approach allows the fund to tap into higher yields that are not available in the more competitive investment-grade space. The average duration of DSL’s bond holdings is 5.5 years, meaning Gundlach has locked in attractive rates that will continue to generate strong income for years to come—even as interest rates trend lower.

DSL also employs a prudent amount of leverage, borrowing against 22% of its portfolio. This “sweet spot” of leverage enhances returns without exposing investors to undue risk. As interest rates decline, the fund’s borrowing costs will decrease, further boosting its profitability. And with its 10.4% dividend payout, DSL ensures that investors receive the majority of their returns in cold, hard cash—providing a steady income stream that is hard to find in today’s low-rate environment.

A Time-Limited Opportunity: Act Before the Window Closes

While DSL remains an attractive investment, the current buying window may not stay open forever. At the time of writing, DSL is trading at a modest 1% premium to its net asset value (NAV), and its share price is nearing our recommended “buy-up-to” price. With the 10-year Treasury yield still hovering below the 5% mark, DSL’s share price could break above this level at any moment—locking in gains for those who act quickly.

The Final Word: Contrarian Investing in Action

In a market dominated by short-term thinking and knee-jerk reactions, contrarian investing offers a powerful way to uncover hidden opportunities. By challenging the conventional wisdom that tariffs will drive up interest rates, we’ve identified a unique chance to capitalize on undervalued bonds through funds like DSL. With its high yield, expert management, and proven track record, DSL is a prime example of how contrarian investing can deliver superior returns—especially in uncertain times.

If you’re looking for more actionable insights and income-generating ideas like this, be sure to check out Brett Owens’ latest special report, “Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.” In it, you’ll discover how to build a portfolio that generates substantial, recurring income to support your retirement goals. Don’t miss out on this opportunity to secure the financial freedom you deserve.