By Carla PasternakAn analysis of the closed-end Zweig Total Return Fund (NYSE:ZTR) reflects stable interest rates, continued added value and secure distributions for shareholders:
Snapshot: Over half of this fund's portfolio is in risk-free U.S. Treasuries. The balance is mostly in blue-chip dividend-payers like pharmaceutical giant Bristol-Myers (NYSE:BMY) and chemical maker Dow Chemical (NYSE:DOW). The bonds carry the highest credit rating possible with virtually no risk of default. They have an average duration of about six years, making the fund well positioned for a stable interest rate environment.
Dividend: The fund has paid dividends every month for the past two decades. Its latest monthly payment of $0.043 a share equates to $0.52 annually, providing a 9.3% yield at today's share price. A 1.02% management fee brings the effective yield to 8.3%.
The fund follows a managed distribution policy, which virtually guarantees investors receive a fixed monthly income. Investors should note the downside of a managed distribution policy is that management may chip away at a fund's asset base to meet its monthly payments if its interest income and capital gains do not provide enough distributable income. That's why we zeroed in on a fund that has increased its asset base while still providing a set monthly income to shareholders. Its distribution now represents 10% of the fund's net asset value. So far this year, the fund's net asset value has grown +6.65%, which bodes well for future dividend hikes.
The distribution comes from investment income earned on the fund's stocks and bonds, capital gains, and return of capital. For 2005, 47% of the fund's distribution was taxed as ordinary income, 46% was a non-taxable return of capital, and 7% qualified for the lower dividend tax rate.
The fund's Automatic Reinvestment Plan allows shareholders acquire additional shares in lieu of cash distributions. You can contact the fund at 1-800-272-2700 for more information on this plan.
Performance: The fund's diversified portfolio of stocks and bonds helped it weather a difficult first half of 2006. Gains in the fund's stock holdings more than offset losses in its bond portfolio due to rising interest rates. In addition, the fund protected its assets by moving into cash and by taking short positions. As a result, for the six months ended June 30, the fund's net asset value gained +0.52%, including reinvested distributions.
More recently, the fund benefited from the sharp rally in the Treasury market in the past few months. The benchmark 10-year Treasury note fell from a 5.15% yield at the end of June to a 4.61% yield at the end of October. Since bond prices move in the opposite direction of yields, the value of the fund's bond holdings rose during the period. The +8.5% rise in S&P 500 over the same four-month stretch was also favorable for the fund's equity holdings.
ZTR 1-yr chart
Valuation/Outlook: Over the past three years, the fund has averaged healthy annual returns of +13%, and so far this year, ZTR has returned an impressive +28% to shareholders. For the past three years, the fund has traded at a discount to its net asset value, but the recent rise in the value of Treasuries has attracted buying interest. As a result, the fund is now selling at a 7.9% premium and its shares are trading near their 52-week highs.
ZTR's share price moves up and down with U.S. Treasuries. However, under the expert hand of seasoned portfolio manager Dr. Martin E. Zweig, its diversified stock/bond portfolio has continued to add value whether interest rates were rising or falling. The fund's share price may rise or fall in reaction to the Federal Reserve's next interest rate decision on December 12, but whatever happens at that time, I expect the fund's diverse portfolio of stocks and bonds to continue to generate secure distributions as it has every month since 1988.