John Hancock Patriot Dividend Fund: Am I Missing Something?

I invested in the John Hancock Patriot Dividend Fund (PDT) a few years ago. In my earlier years I invested for growth but being an aging baby boomer, I have shifted some of my holdings to income oriented investments.

I recently received a quarterly report and it gave me cause for some reflection.

For those who wish to do a detailed investigation of PDT, there is much information available. For the moment, PDT is a closed-end fund investing in preferreds, primarily in the Utility sector of the economy.

A few points for consideration.

When one thinks of safety (or defensive sectors), I cannot think of a more safe place to be. Sure, we all need food and medical care, but we also need to heat our homes and have electricity. Just my opinion.

The more compelling story, however, is the differential between the NAV and market price of this fund. I have done an analysis (based on the quarterly report just received) for the period April 2006 to the present July, 2008. On average during that period, the NAV has been at 12.10 while the market price has been $10.50. This represents a discount of 13.2%, or $1.60 per share.

The current dividend is $.58 per share. The market price as of a few days ago was $8.63, representing a current yield of 6.7%.

OK. I am fully aware that the fund will probably not liquidate  - although maybe they should. But, just for fun, let's assume there might be a liquidation OR investors will eventually bid the market price to the level of the NAV (although, for some strange reason, they have not since April of 2006).

If that were the case, an investor today could enjoy a current yield of 6.7% ($.58 per share) and capital appreciation of $1.60 per share (see above.)

On an investment of $8.63 per share, a total return of $.58 plus $1.60 equates to some 25% plus return.

Or maybe people will just turn out the lights.

Disclosure: Author holds a position in PDT

Comments

[Jakester:]

What is the annual management fee? If it's very high, this could explain the discount....

2008 Sep 10 09:59 AM

[Jakester:]

I looked up the management fee and it was 1.71% in 2007. For a fund that emphasizes income, this is quite an annual drag. They also hold a decent chunk of financial industry preferreds...not quite as immune to the vagaries of the economy.

2008 Sep 10 10:57 AM

[gatewayast:]

The history of most closed-end funds is that they typically sell at a discount to NAV. Just look at high quality Adams Express and Tri-Continental who have been around "forever" both of which have quality assets yet sell at similarly large discounts to NAV as does Patriot. The best hope for these funds is that shareholder activists such as Art Lipson and George Karpus purchase a large stake and try to force management to open-end the fund. Good luck.

2008 Sep 10 11:00 AM

[raytayzmd:]

...mostly utilities?...well, yeah, but look at the other forty plus per cent...26% in financials -- banks, brokers and insurance companies...not exactly a sweet spot to be right now as demonstrated by the plummeting prices of Lehman's and others' preferreds...also, PDT is heavily leveraged at something like 37% and associated interest costs have increased due to illiquidity in the preferred auction market...it has been around a long time, however, and might turn out to be a worthy investment.

2008 Sep 11 12:28 PM

[Zo Man:]

Check recent press releases. The fund is now conducting 5% semi-annual tender offers at 98% of NAV if the fund's discount remains above 10%. A 5% tender is currently ongoing and closes on Sept. 23rd.

2008 Sep 11 06:20 PM

[John Kerans:]

Robert --

This behavior is common for a CEF. It drives away those investors who demand capital gains .. as well as those investors who give preservation of capital a higher priority than income.

Result? Opportunity for you to buy something undervalued, and get reliable income, forever.

Jakester --

The management fee is deducted before Robert receives his dividends. If he's happy with a 6.7 yield, any criticism of the management fee is not relevant.

John Kerans

2008 Sep 17 12:23 AM

[Robert Nilsen:]

Thanks to all for the thoughtful and intelligent comments. Many good points raised by all.
Gee ... wouldn't it be nice if one paid less than $8.63 per share??? !!!!
Good luck to all and God Bless America.
Robert

2008 Sep 18 11:38 AM