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Summary

  • Nuveen set up 2 closed end funds to replicate the Dow.
  • DPO and DPP have high dividends.
  • But both have not done their job.

Nuveen Asset Management started two closed end funds in the 2000s. The Dow 30 Premium & Dividend Income Fund (DPD) and Dow 30 Enhanced Premium & Income Fund (DPO). These funds were designed to create income and capital appreciation while also trying to substantially replicate price movements of the Dow. Webster's dictionary defines "substantially" as "to a great extent or degree." Let's see how well they do this.

These funds are almost identical. They have in order the same top 10 holdings. Both funds use covered call options as a way to create extra income and protect against downturns. They have the same dividend policy. They have quarterly payouts and the dividend yields are 6.75% and 6.53%, respectively. The expense ratios are 1%. The one difference is that DPO uses swaps as leverage to create higher returns. Its leverage rate is 23%.

The Yahoo graph below shows the returns of these two funds since the inception of DPO. DPD has been around for two more years. They have both done pretty poorly. DPD has lost 25% and DPO has lost 33%. Including the dividend the annualized return for DPD is 2.64% and DPO is 1.8%. The prices seem to correlate with each other. DPD is always above DPO by a few percentage points. That could be because DPO is leveraged. DPO doesn't give any specific information about its swaps so we don't know how changes in price affect the fund or how they are specifically used.

(click to enlarge)

The goal of these funds is to track the Dow. The below Yahoo graph shows that these two funds aren't doing this. The Dow is up over 20% while the funds are in the negative. For the first two years they kind of seem correlated but then in 2009 the correlation is gone. However, the annualized return tells a different story. The annualized return of the Dow is 3.03%. It is only beating DPD and DPO by .39% and 1.23%. Calculating the annualized return for all nine years of DPD doesn't change the results. It has an annualized return of 4.31% which is still lower than the Dow's 5.55% return. (click to enlarge)

2009 was a turning point for these funds. The Yahoo graph below shows that since 2009 the Dow has increased by 60% while the funds still have a negative return. During this time the annualized return for the Dow was 10.41%. DPD's return was 6% and DPO was at 6.32%. At the end of 2009, we see a quick 20% price drop for both funds. I believe this was because Nuveen cut the monthly dividend. DPO's dividend was cut in half and DPD's dividend was cut by a third. A dividend cut will most likely cause the price of any investment to decline. I didn't see any other financial news on Nuveen. The economy was coming out of the recession at the end of 2009 and was on the upslope. The funds should have increased with the Dow. Staying stagnant for the past four years was probably helped by Nuveen cutting the dividends three more times. The dividend cuts were in March 2011, September 2011, and March 2012. Looking at the graph above one can see small price drops every time the dividend was cut. Any momentum the funds may have had was cut short because of this. The funds also started going from monthly distribution to quarterly distribution in March 2011. Investors aren't going to like a company that messes this much with its distribution. From all the negative information above, it's no wonder why both funds are trading at a discount to NAV. DPO is at -5.11% and DPD is at -4.89%.

(click to enlarge)

If an investor is looking for an investment that tracks the Dow I would not recommend either of these. The funds were set up so that they would limit the downside risk and still have all the upside potential. The covered calls haven't helped. The funds still drop as much as the Dow and both have lagged tremendously when the Dow has increased. DPO has done worse and it seems having leverage has hurt more than it has helped. It has the lower yield and its price has lagged DPD. On an annualized return the funds don't look so bad but that is only because of the dividends. I wouldn't rely on the dividends of these funds to make up any difference in price lost especially when it has been cut four times. I would look elsewhere when trying to find an investment that tracks the Dow. One of these is the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA). It has done a better job tracking the Dow.

The funds homepages for some of the information in this report is here DPD, DPO.

The historical prices were found on Yahoo Finance.

Source: Trying To Follow The Dow