Cornerstone Total Return Fund (NYSEMKT:CRF) has an annualized dividend yield of 17.0%. CRF's monthly distribution policy for 2013 reflects 21.0% of the net calendar assets of $5.09 per share at 2012 year end. The monthly distribution has a "return of capital" ("ROC") and doesn't reflect the income (net investment income) from other investments.
Outliers: CRF is currently trading at a premium of around 30% (as of 11/01/13) and boasts an annualized dividend yield of 17.0%. These numbers sit well outside the CEF industry average of a 4.9% discount and a 6.8% annualized distribution yield. What gives?
Timing is Everything: As with most CEFs, prices on the ex-dividend date typically drop by the period's dividend amount. Because of its sizeable dividend, we decided to take a look at price movements for CRF over the past 22 months around significant dividend dates to investigate these price swings.
From Pre-Ex-Dividend Dates to Post Dividends Payable: As can be seen in the chart below, purchasing the stock on the ex-dividend date and selling it before the following ex-dividend date produces a total gain of 43.1% over the 22 month period. Of course this strategy misses out on the dividends, but the price swings around the ex-dividend dates more than make up for this. In fact, this is well above the return received if CRF were held for the entire 22 month period.
Let's Take a Closer Look: The chart below shows this strategy's monthly price change in the "Pre/ExDate". As you can see, the radical price swings around CRF's ex-dividend dates can provide a strong return (2.0% average monthly gain) under this monthly buy/sell strategy-a 43.1% strategies for 22 months.
However, This Is Not a Perpetual Motion Machine: During this period, CRF has offered two additional rights offerings: one that expired on December 21, 2012, and another which is currently scheduled to expire on November, 29, 2013.
CRF's current offering is a one-for-three-rights offering. Each stockholder will be issued one right for each whole share owned. This means that a total of 1,148,130 shares will be available as CRF's current 3,446,192 outstanding shares.
Subscription Date: The subscription period will commence on Friday, November 1, 2013, and is scheduled to expire at 5:00 p.m., New York time, on Friday, November 29, 2013, unless extended.
Price: The actual subscription price per share, as determined on the Expiration Date, will be the greater of: (1) 107% of the net asset value per share as calculated at the close of trading on the Expiration Date and (2) 90% of the market price per share at such time.
1. Most often, rights are transferable (tradable on the exchange), but not in the case of CRF. Transferable rights in this situation would put CRF on the fence of operating a "Ponzi" scheme.
2. The rights will be priced at either 107% or 117% of CRF's NAV per share. Not only are shareholders overpaying but this money will be used to pay out the 17.0% annualized distribution that makes CRF such an attractive, but misguided investment.
CRF has put a lot on the line with this "Rights Offering" because if it doesn't appeal to shareholders, then the "jig is up". It will be very difficult for CRF to keep up this pace if the "Right Offering" isn't executed.
However, if the "Right Offering" is successful, then a monthly buy sell strategy may continue to be appealing.