Why I Am Adding PGF and AGD to My Portfolio

To give some balance and hopefully a little stability to my portfolio, I am now adding a CEF and an ETF. Both pay monthly distribution, always a nice factor, and give some opportunity for future capital appreciation.

First up is the ETF: PowerShares Preferred Financial Portfolio (PGF). This fund tracks an index of preferred shares of financial institutions. PGF is about 40% each in the preferred stock of insurance and banking. The balance of about 20% is diversified financial services. The current distribution yield is right at 7%. Financial companies have had a terrible last year (self inflicted!), but many good companies have been driven downward at the same time. I think PGF is a good place to invest for income and the possibility of price appreciation if/when the financial sector recovers.

The closed end fund [CEF] that has caught my attention is the Alpine Global Dynamic Dividend Fund (AGD). This fund employs several strategies to maximize tax advantaged dividend income. Here is an outline of their stated strategies (paraphrased):

• High dividend value stocks: High yielding companies that management feel are undervalued. Global approach to find opportunities.
• Dividend “capture” strategy: Rotation in and out of high yield stocks to capture extra dividends paid in different months and special one-time payouts.
• Growth potential: Attractive yielding companies with potential for earnings and dividend payout growth. Again, a global approach to selection.

Some positive aspects of the fund are that they do not use leverage or sell covered calls to enhance the yield. All payouts have been earned income, not returns of capital. Also, AGD definitely has a global approach; only 22% of assets were U.S. based companies. Current yield for AGD is 10.2%. If someone is planning on investing with a tax advantaged account, they may want to look at the similar, Alpine Total Dynamic Dividend Fund (AOD), which cares not about finding tax advantaged dividends and yields and attractive 12.4%.

I do have a couple of concerns about the fund. First, it currently trades at a 13% premium to NAV. Historically, the fund has traded at a premium, but this is at the high end of the range. The other concern is the NAV erosion: Is it due to market conditions or the result of faulty trading activity in the dividend capture strategy? Adding AGD to my Income Portfolio give me the opportunity to watch for buying opportunities if the price/NAV premium narrows.

Disclosure: I currently do not have a position in PGF, AOD or AGD.

Comments

[granger:]

Thanks for the PGF idea. Disclosure: I own AOD.

2008 May 08 02:56 AM

[OJO Zafado:]

The PGF does indeed look good as a diversification. I have been using these individual issues as a substitute in my IRA to additional re-investments in my bond ladder. Nearly half of my 2008 rung has matured and I have had a call at a premium to my cost basis on a '10 issue. Quality in med-term corporate bonds seems not to exist these days vs any kind of reasonable yield for risk premium and inflation protection. I am replicating the current yield of PGF with BAC investments in FBF-N. Others like C-F, JPM-W, MSJ, Goldman Sachs HJJ, USB-D, recent investments in TWC have done very well /GJG & PYI. I have hedged these higher payers with the very attractive Adjustable rate pfds selling well below par with slightly lower yields. The FNM-P, BAC-E and UBS-D all provide some kind of inflation protection. These are mostly selling below the minimium coupon. LIBOR will have to rise enough for the LIBOR + index to kick in. So there is a gap to the inflation protection. One Caveat the ISM (SallieMae) has not fared so well but may be a good longer term bet as it now has less than 10 years to maturity. It has kicked out some good increases on the inflation data recently. A democratic sweep of all 3 houses will dramatically improve it's quality/price. With the exception of ISM all of these listed have such !HUGE! premiums to the same issuer's bond coupons and YTMs as to make investing in their bonds of equal quality a "dubious" investment as we see real inflation in our everyday life severely eroding the value of the medium term bonds going forward. I like the fixed prferreds that are selling well below par with near term call dates. If called and some probably will be at some time you will get a hansome premium to your cost basis after enjoying the superior yield and quality. By then we would hope to see a return of +5.75% on high quality medium term corporate bond debt. That is when I will start filling my '12-'15 bond ladder rungs again. It seems there is no such thing these days that if imagined can't be invested in. I am also hedging with the DXSKX against higher rates eroding my preferreds valuations. Now we also have the PST "ETF" showing up in a very timely fashion. This seems to be a better bet than it's +20 year maturity sister TBT. These are all shorting the treasuries. I have held foreign bond positions in GIFD, MERKX,PFBDX, and LSGLX. The returns have been rewarding! However the cycle may be turning. While long term these may still outperform they look vulnerable in a US economy suffering/facing strong inflation and higher interest rates. Using the DXSKX allows me to incrementally buy into the short ten year position without the payment of commission fees. So we see again in the aftermath of the markets selling off yesterday the Treasury BULLs having their day. Even as the Treasury floated out a record $15 billion in 10 year notes, the FED increased TAF by 50% and TRCAs by 100% to the ECB and SNB. The lower rates in the long term are just unsustainable IMHO. Stagflation is here! Rates are going alot higher no matter who wins the Nov election for leader of "The FREE money world!"

2008 May 08 08:04 AM

[Elliott:]

I like to see three things in a closed end fund: a relatively stable NAV; a high distribution yield; and a market price below the NAV (discount). Since AGD only meets one out of three criteria I won't consider it, although I really do like the concept of international equity dividends.

Your article mentions that a positive feature of AGD is the lack of leverage and option selling. It's conventional wisdom those are bad things; however, I do think they can be good tools in the hands of fund managers that use them wisely. Take a look at this chart -- it compares the NAVs of AGD and DPO:

finance.yahoo.com/echa...;range=1y;compare=xdpo...

DPO uses leverage and option selling on the Dow 30, pays 12% yield, and is priced at a slight discount. The NAV for DPO is down about 5% in 2008 vs. 13% down for AGD.

2008 May 11 02:25 AM

[Elliott:]

Better link for a chart of NAVs of AGD vs. DPO

tinyurl.com/5g6zrx

2008 May 11 02:30 AM