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GlobalTrekker has traded closed-end funds institutionally, and profitably, for over 20 years and maintains a proprietary database with weekly regression analysis of all funds traded domestically. Objective, detailed data research, free of survivor bias, has been the hallmark of his investment... More
  • Beware of Dividend Recommendations from and Indie Research 2 comments
    Jun 23, 2010 1:32 PM | about stocks: ZTR, PHK, AOD, SLM, JRS, JQC, KYN, PHT

    After seeing two articles in a row from the "the Staff" on oversized dividends, I felt it might be best to warn fellow investors that the staff's research is suspect.  Their data appear to be gleaned from simple screening of recent reported distributions and don't distinguish between pay-outs and dividends.  Semantics aside, most Seeking Alpha readers who invest in closed-end funds know to be wary of these large distributions that often mix income dividends with return of capital.

    Of the six funds named in their most recent article, "Oversized Dividends in Closed-End Funds" (, most are poor picks that are likely to lose you money on your principal while you are seduced by illusory pay-outs.

    Zweig Total Return Fund (NYSE: ZTR) is an unleveraged, mid-level fund, trading at essentially par that invests in U.S. stocks and government bonds.  If you reflect on this for a moment, you might wonder how they achieve a 10+% divididend.  The answer, they don't.  The latest closed-end fund mantra comes into play:  "Managed Distribution."  ZTR is returning your capital on a monthly basis.  Their income-only yield is 1.38%

    Pimco High Income Fund (NYSE: PHK) is a highly-leveraged junk-fund run by the legendary Bill Gross.  Its yield, which is real income and gains, plus its stewardship have also resulted in a stratospheric-premium of over 46%.  Thus, for every $12 share you buy, you are getting eight dollars and change in actual assets.  Yet, in fact, since inception (seven years) total-returns have been slightly under 12%.  What's not to love?  Well, risk.  About 1/3 of that total-return is a function of the premium -- which could vanish in an afternoon (look at AOD).  Examining total-returns for the fund's NAV, we see a still-very-respectable 8+% annualized return.  The problem is you could achieve that same NAV return with much less risk.  OSM will return the same annualized return, at a minimum, for the next seven years (known ahead because of its term feature) with far less risk.  PHK is our Number One short.

    Nuveen Real Estate Income Fund (AMEX: JRS) is another fund that is leveraged with a far smaller income-only yield (roughly 6.8%).  It, too, trades at a premium and has had a very middling total-return since inception.

    Nuveen Preferred Convertible Income Fund 2 (NYSE: JQC) is the only decent pick in the litter with a solid 12% discount, moderate leverage, low expense ratio, and real yield.  Wonder why it is the only one with lots of institutional ownership?  Wonder why the staff didn't see the difference between this fund and the others?  Most likely because simple data screens are not sufficient tools to put your hard-earned money at risk.

    Lastly, Kayne Anderson MLP Investment (NYSE: KYN) is a very poor pick:  highly leveraged, over-priced sector focus, huge expense ratio (4.9% annually), high premium, fake yield, and underlying assets that pay-out their managers to a degree that would shame a hedge fund.  Pioneer High Income Trust (NYSE: PHT) is another junk fund that is highly leveraged and trades at an enormous premium, all the while with many worthy alternatives.

    I do wonder how "indie" the people at Indie Research really are.  It does seem like they may just be hawking yet another financial-information website.

    Disclosure: Long JQC, AOD; short PHK, PHT, JRS

    Stocks: ZTR, PHK, AOD, SLM, JRS, JQC, KYN, PHT
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Comments (2)
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  • AAdams
    , contributor
    Comment (1) | Send Message
    It doesn't seem like the article is making any recommendations, instead its just pointing out the stocks with the biggest yields. But thanks for the analysis, I'm new to closed end funds, so this helps me a bit.


    16 Aug 2010, 11:41 PM Reply Like
  • Scott F
    , contributor
    Comments (10) | Send Message
    The recommendations could be clearer. OSM and JQC look solid. The other funds the Indie Research people promote -- ZTR, PHK, JRS, KYN, PHT -- should be avoided. Also, we should be wary of the advice in general from Indie Research.
    17 Aug 2010, 08:08 PM Reply Like
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