Alpine Global Dynamic Dividend Fund: Solid Low-Risk Strategy

Alpine Global Dynamic Dividend Fund (AGD) is a new closed-end fund run by Jill Evans of Alpine Funds -- the same folks who brought us the Alpine Dynamic Dividend Fund [ADVDX].

AGD pays monthly dividends of $0.15, which equate to $1.80 a year and give the fund a current yield of 8.4%. The fund is expected to charge an annual management fee of around 1.3%, which will reduce the effective yield by the same amount.

Like its predecessor, the fund uses a "dividend capture" strategy to optimize returns. It buys high-yield stocks with staggered quarterly payout dates, and by doing so, the fund can capture six tax-advantaged quarterly payments over 12 months instead of just four. AGD is thus maximizing the amount of tax-advantaged dividends it can offer, since stocks must be held for a 61-day period surrounding the ex-dividend date to qualify for the reduced 15% tax rate.

Unlike ADVDX, which focuses on domestic stocks, this new fund can hold up to 80% of its portfolio in foreign stocks. Since foreign securities generally pay higher dividends, and since the pace of economic growth abroad is expected to increase, this fund should deliver outstanding returns going forward.

Many closed-end funds extract extra yield by leveraging off their asset base. In other words, they borrow money at low interest rates in the hopes of reinvesting those same funds at higher rates. The average closed-end fund leverages 30% of its portfolio value. This exposure to changing interest rates tends to make these funds more volatile and therefore more risky. According to its prospectus, AGD can leverage only up to 10% of its assets, making this fund safer than most.

That's not to say the fund's strategy is entirely risk-free. Because the fund employs a dividend capture strategy, it incurs high turnover and brokerage fees. In fact, the turnover rate for ADVDX is 216%, well above the 30% average for similar funds. Manager Jill Evans said she expects AGD to have about the same turnover rate as ADVDX.

Action to Take: With a generous yield, tax-advantaged dividend income, and a fairly low-risk investment strategy, investors like what they see here. As a result, shares of AGD are now trading at a premium to the value of the fund's underlying portfolio. That, together with the fund's short track record, adds some risk to this investment. Still, the dividend capture strategy has worked reasonably well for ADVDX, which has paid out steadily rising dividends for almost three years. As such, I like this fund for low to medium-risk investors.

Comments

[Eugene Falk]

I would like to point out that ADVDX is 40% foreign. Gene

[Chamois16]

The distribution and distribution yield are net of management fees. All closed-end funds initially trade at a premium to NAV because of the offering concession to underwriters. Most equity based funds eventually trade at a discount to offset management fees; ETG and ETO, which also exploit dividend capture strategies, are examples.

Experienced CEF investors wait until the market price has stabilized at a lower level relative to NAV, usually 120-200 days after IPO. The Haas Business School at UCBerkeley has a study explaining why this discount is normal, how it is computed and how long it takes to stabilize: faculty.haas.berkeley....

[GeoffConsidine]

I really don't like it when people call a strategy 'low risk' while presenting no information on tha actual risk. Covered call funds have been called 'low risk' but many have enormous volatility. ADVDX is certainly not 'low risk'. Over the past three years, SDVDX has been 29% more volatile than the S&P500. Is this low risk? Not by my thinking. Now you are calling a new fund that follows the same strategy--except emphasizing foreign assets--Low Risk??? Huh? Overseas markets are typically higher volatility, so I would expect that applying the same strategy to overseas markets will lead to more volatility. Then we add in high turnover and related costs. How can this possible be called a 'solid low risk strategy'??