DCA: Management's Doing the Right Thing

On Friday, I purchased Dividend Capital Realty Income Allocation Fund (DCA) at $6.00 a share. DCA is a closed-end fund that invests in common stock, preferred stock and debt securities of real estate companies.

DCA has traditionally traded at a premium to NAV, but last week management announced a dividend cut from $0.11 to $0.05 and a reduction in leverage deployed. This caused the market price to plummet. DCA has traditionally traded at a premium over NAV. Here are its monthly year-to-date figures for discount/premium over NAV:

• January 31, 2008: +10.85%
• February 2,2008: +5.62%
• March 31, 2008: +6.38%
• April 30, 2008: +8.92%
• May 31, 2008: +8.64%
• June 13, 2008: -12.88% (over 20% move in less than 2 weeks!)

Management seems to be doing the right thing. Even after the distribution cut, the dividend yield is still about 10%. The previous distribution of nearly 20% was unsustainable and much of it was simply return of capital. The current $0.05 dividend is sustainable, and the company might easily raise the dividend again in the future if lending conditions improve and the yield curve steepens.

One negative feature of DCA is a high expense ratio over 2%. But I see this as more of a swing trade than a long term investment. I wouldn't be surprised to see the discount from NAV shrink, or a premium to reoccur, which would lead to high total returns.

Full Disclosure: I am long DCA.