Conclusion: While “A foolish consistency is the hobgoblin of little minds…” it is an important consideration for investors seeking monthly distributions. Many investors look to closed-end funds (CEF) for attractive, secure monthly distributions. The most secure CEF distributions are those that are based on net investment income to common equity (NIICE).
In a review of CEFs that pay monthly distributions based on NIICE, the following CEFs deserve further consideration for possible additions to the equity-income portion of an investor’s portfolio: Trust/Aberdeen Global Opportunity Income (FAM), Alliance-Bernstein Global High Income Fund (AWF), Credit Suisse Asset Management Income (CIK) and Dreyfus High Yield Strategies Fund (DHF).
Basis of Analysis: A “screen” was employed to filter 503 CEFs in the Eqcome CEF Database that have the following characteristics:
- A policy and history of monthly distributions;
- A monthly distribution based on net investment income;
- A current monthly annualized yield of over 10%;
- A stock currently trading at a discount to net asset value (NAV).
Results: The following chart is a summary of the 41 CEFs classified by fund type that met the above criteria. The fund types are arranged in descending order. This order is based on the average percentage decline (column “I”) in the current monthly distribution (column “C”) compared to the monthly distribution (column “D”) for the same period last year
The average CEF monthly fund type percentage decline was 33.4%. WrldIncFnds was the only fund type that maintained its average monthly distribution rate year-over-year. The greatest current monthly distribution decline occurred in the SpecEqFnds, down 73.9%. The two CEFs that comprised the fund type were real estate related—a sector that suffered large distribution and price declines.
CEF Selection Process: The following chart is a list of those CEFs that did not reduce their year-over-year monthly distribution, i.e., the monthly distribution remained the same as the similar period the previous year and the months in between.
Of the 7 CEFs that met the stated criteria above and maintained the same monthly distribution, 3 were HiYldBndFnds and 4 were WrldIncFnds.
HiYldBndFnds: While the 3 HiYldBndFnds maintained their monthly distributions for at least the previous 12 month period, all 3 had previously reduced their distributions at some past point.
Credit Suisse Asset Management Income (CIK) is an established CEF. It has been in operation since 1987. Its current monthly dividend of $.03 per share has been so continuous since the fall of 2005. At that time it was reduced from a $.035 per share monthly rate.
Dreyfus High Yield Strategies Fund (DHF) is also a CEF with a long operating history. It was founded in 1998. DHF’s current $.03 per share monthly distribution rate was actually increased from a $.0285 per share July of last year. It had previously reduced its monthly distribution rate in January of 2006 when the rate was at $.0325 per share.
Both CIK and DHF are $3.00 stocks trading at yields over 11% and at a discount to NAV at the time of the study’s pricing on 8/17/09.
WrldIncFnds: First Trust/Aberdeen Global Opportunity Income (FAM) began operation in 2004. FAM has pretty much maintained the current $.13 per share monthly distribution since inception. (For the second half of 2005, its monthly distribution rate “down-ticked” to $.1228 per share but then returned to the $.13 per share monthly rate in January of 2006.)
Alliance-Bernstein Global High Income Fund (AWF) is also a CEF with a long operating history. It dates back to 1993—prior to international investing being sexy. Since September of 2004, AWF has raised its monthly distribution 3 times to its current monthly distribution rate of $.0925 per share. The last time it reduced it distribution rate was September 2004 when it was at the rate of $.0775 per share.
Both FAM and AWF are trading at attractive yields and at a discount of approximately 10%.
- This analysis is based on monthly taxable distribution generated from Thomson and Lipper as sources and stocks were priced on 8/17/09. The designation of a distribution as net investment income may be changed at year-end to reflect tax and accounting issues.
- There has been no attempt to analyze in detail the portfolios of the CEFs highlighted in this article.
- There is also the issue of whether previous distribution cuts are behind the HiYldBndFnds CEFs? Are such portfolios still vulnerable to additional deterioration?
- HiYldBndFnds as a fund type have already experienced a 50% YTD price appreciation. Whether investors will sell the group to harvest gains if the economy deteriorates or the stock market declines should be taken into consideration. (WrldIncFnds in contrast are up a lesser 27% YTD.)
- WrldIncFnds are subject to currency adjustments which can be volatile and meaningful given a change in the credit rating of a foreign corporation or sovereign.
The highlighted CEFs may provide attractive, secure monthly distributions, but there is no guarantee their current distribution rates will be maintained.
Appendix A: This appendix is a detailed break-out of the above screen. This table may be useful to investors as ex-dividend dates are fairly consistent from month-to-month for the purpose of “dividend rolls”. (Click here for original report to view Appendex A and for viewing larger editions of charts.)
Disclosure: Long AWF and DHF; likely to buy more of the group