Need A 'Steady Eddy' Income Source?

May.13.14 | About: DNP Select (DNP)


If you want consistency, Duff & Phelps Select Income is hard to beat.

DNP may not be exciting but this “Steady Eddy” has a distribution rate of 7.75%.

It also passes the test for consistent management; Nathan Partain has been managing the fund since 1998.

Since July of 1997, Duff & Phelps Select Income (NYSE:DNP) has been churning out regular distributions of $.065 per share each and every month. The distributions survived two recessions in that time period. You'd be hard pressed to find returns more consistent than that.

(Note: In the interest of being totally accurate, the December distributions in 2000, 2001, 2003 and 2004 were .075, .075, .08, .08 respectively.)

Why hasn't the distribution grown? Because DNP has chosen to distribute at a high rate relative to NAV, which limits NAV growth, which in turn limits distribution growth. It's basically a pay me now, rather than pay me later policy. The fact that it has been able to maintain this high payout ratio while maintaining the NAV is a testament to its management.

DNP Overview

DNP inception date was January 1987. The funds primary objective is current income and growth of income (it's been much more successful at the former then the latter). The Fund seeks to achieve its investment objectives by investing primarily in a diversified portfolio of equity and fixed income securities of companies in the public utilities industry.

Total Returns

The goal of DNP is not to beat the SPX in total return but it compares favorably over a number of time periods:

Total Return Price

Total Return NAV

Total Return SPX

10 Year

8.86 %

12.95 %

7.73 %

5 Year

15.77 %

21.59 %

17.60 %

3 Year

9.29 %

16.73 %

14.23 %

1 Year

4.73 %

14.07 %

17.92 %

Click to enlarge

Total return numbers are from Morningstar.

These returns ignore tax consequences and I'm not suggesting I would substitute DNP for SPX in a portfolio. Rather I am pointing out that even though DNPs primary goal is income, it has still produced good total returns for many years.

Risk Reward

There has been a lot of debate here on SA and elsewhere on how to measure risk. I have chosen to use the Sharpe Ratio because it is widely used and well understood.




1 Year



3 Year



Click to enlarge

Sharpe ratio for the SPX is from Morningstar.

Sharpe ratio for DNP is from Fidelity.

I like to show the Sharpe ratio for all the funds I review, but I put less emphasis on this metric when I'm interested in a fund mainly for income.


DNP has sold at a premium for most of its history. Since April of last year the price has fallen while the NAV has risen. This has lead to DNP premium dropping substantially, down to 2.73% at end of day May 9th, 2014.

Time Period


6 Months

6.79 %

1 Year

9.37 %

3 Year

20.04 %

5 Year

23.78 %

Click to enlarge

Premium/Discount data is from CefConnect.

I regard this fall in premium as a potential opportunity. If the fund reverts to its mean the premium will expand and the falling price has led to a higher distribution rate.

The downside is the market is signaling it sees a problem. The market is likely reacting to the threat of rising interest rates, which may have a negative impact on the income-generating equities and bonds that this fund invests in and make the funds income compare less favorably with other income generating investments.


DNP uses leverage; its effective leverage is a little less than 30%. In a down-market leverage will work against you. However, it is a major component of how most CEFs generate returns. CEFs can borrow at much better rates then individual investors and in most market conditions they can use that borrowing power and leverage to boost returns. DNPs management has been through multiple recessions without lowering their distributions, which indicates they have managed their leverage wisely.


DNPs adjusted expense ratio (excluding interest) is 1.10 % (from CEFConnect). This expense ratio is on the low side for equity CEFs.


DNP investments by asset type:

  • Common Stock (69%)
  • Bonds & Cash (18%)
  • MLP (11%)
  • Preferred Stock (1%)

By industry sector:

  • Electric, Gas & Water (73%)
  • Communications (13%)
  • Oil & Gas Storage, Transportation and Production (11%)
  • Other (2%)
  • REIT (1%)

Top Ten Holdings


Percent of total


5 Year AVG PE

Dominion Resources Inc. (NYSE:D)

3.3 %



Sempra Energy (NYSE:SRE)

3.2 %



NextEra Energy Inc. (NYSE:NEE)

3.2 %



Northeast Utilities (NU)

3.1 %




2.7 %



Alliant Energy Corp. (NYSE:LNT)

2.7 %



CenterPoint Energy Inc. (NYSE:CNP)

2.5 %



CMS Energy Corp. (NYSE:CMS)

2.4 %



Spectra Energy Corp (NYSE:SE)

2.4 %



NiSource Inc. (NYSE:NI)

2.4 %



Click to enlarge

Source of asset types, industry sectors and top ten holdings is DNP Investor Relations. PE Ratios are from Morningstar.

In my view the largest risk for this fund is if there is a large correction in utility stock prices. Valuations in the utility sector have been driven higher by the lack of alternatives for income investors. If interest rates rise and other income investment start offering better yield, utility stocks may be driven lower. Like most utility CEFS DNP is leveraged and that will compound the negative impact of a correction in the utility sector. These risks are not particular to DNP and I believe are somewhat mitigated by DNPs managements long and successful track record, but is certainly a risk that should be considered when investing in this or any fund in this sector.


For an income investor looking for more exposure to utilities, the distribution rate and consistency make this fund an interesting option. This fund has shown no growth in distributions and this may make it unappealing to some investors. From my prospective it's hard to argue with a 7.75% distribution rate and a distribution amount that has not been reduced through two recessions.

I encourage all investors to do their own due diligence and please share your findings. I strongly believe that one of the best things about Seeking Alpha is the sharing of ideas. Please comment, divergent opinions are welcome.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DNP over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.