DNP Select Income Fund Vs. S&P 500 Index Fund

| About: DNP Select (DNP)

Summary

Does DNP Select Income Fund outperform S&P 500 Index Fund?

The assumption in the finding was the fees of each fund for the last 10 years.

The 10-years net performance return showed DNP Select Income Fund outperforming the S&P 500.

In addition to 10-years net performance, since 1987 to 2016, DNP has outperformed S&P 500 Index Fund.

In the search for better stock performance from my own personal portfolio, I decided to research more into this income fund. The reason for my interest was due to a colleague of mine at work who recently recommended me a fund called DNP Select Income Fund (NYSE:DNP). His investment thesis into DNP was due to the fund providing monthly income at a very little cost. He liked the fund so much that he invested bi-weekly through his 401k plan. This sparked my interest in researching this fund and see if it could be a better investment than an investment in the Vanguard S&P 500 ETF (NYSEARCA:VOO).

DNP Select Income Fund

To make an assessment of the two funds, I went on Schwab website to research about DNP and VOO in more depth. According to Schwab, DNP Select Income Fund is a close-ended investment company that focuses investing in various sectors within the utilities space, while providing long-term growth of income. This fund has been around since January 1987. Below is a summary of the fund information.

Source: Charles Schwab & Co., Inc

From the Fund Profile, DNP Select Income Fund's total holdings currently stand at 118. The top 10 holdings within this fund are made up of mostly energy companies and the top holdings take up 39.6% of the entire total assets. DNP top 10 holdings can be found in the figure below.

Source: Charles Schwab & Co., Inc

DNP is also actively managed to follow the U.S Utilities indexes. Since it is actively managed, the net expense ratio is higher than those of passively managed funds such as the Vanguard S&P 500 Index Fund ETF. The key information from DNP's fund profile I found was the annual report net expense ratio which was 1.03%. This will be a key information to use to assess the overall performance against other funds. The second information I found from researching DNP was the performance track record for the last 10 years. Below is the fund's overall performance growth since 2006 with a $10,000 initial investment.

Table 1 - DNP 10-Year Overall Performance With $10,000 Investment

Year

Return

6/30/2016

$31,742.17

12/31/2015

$24,414.21

12/31/2014

$28,042.91

12/31/2013

$22,321.39

12/31/2012

$19,031.86

12/31/2011

$17,666.55

12/31/2010

$14,416.62

12/31/2009

$12,539.42

12/31/2008

$10,060.09

12/31/2007

$14,104.11

12/31/2006

$12,818.47

The third I looked at was how much the fees of this fund would have been for the last 10 years. This will provide insight into the true performance of the fund.

Table 2 - DNP 10-Year Overall Performance With $10,000 Investment & Fees

Year

Returns

Assumed Net Expense Ratio

Assumed Fees Each Year

6/30/2016

$31,742.17

1.03%

$326.94

12/31/2015

$24,414.21

1.03%

$251.47

12/31/2014

$28,042.91

1.03%

$288.84

12/31/2013

$22,321.39

1.03%

$229.91

12/31/2012

$19,031.86

1.03%

$196.03

12/31/2011

$17,666.55

1.03%

$181.97

12/31/2010

$14,416.62

1.03%

$148.49

12/31/2009

$12,539.42

1.03%

$129.16

12/31/2008

$10,060.09

1.03%

$103.62

12/31/2007

$14,104.11

1.03%

$145.27

12/31/2006

$12,818.47

1.03%

$132.03

Fees Total

$2,133.73

Net Return Through 2016

$29,608.44

Looking at Table 2, I made a few assumptions when calculating DNP 10-year investment fund. The first assumption was that the net expense ratio was 1.03% for 10 years. While this is not accurate, it should provide a safe assumption on what the fees could have been throughout the up and down years of this fund. The second assumption I made was fees each year based on the 1.03% net expense ratio. Again, the fees could have been higher or lower each year. Finally, based on my assumption and research into DNP, the fund would have produced a net investment return of $29,608.44 from 2006 to now. Next, I'll provide my research into Vanguard S&P 500 index and document the net investment return on that fund.

Vanguard S&P 500 Index Fund ETF

While there is a ton of S&P 500 index funds out there, I chose to focus on the Vanguard 500 Index Fund since it is one of the most popular index fund out there with assets over $236.2B. Also, Vanguard mission statement as a company has been to provide low cost investment vehicle for all its clients. This index should be able to provide a clear benchmark to compare with DNP since it provides the market performance at low cost. Vanguard S&P 500 Index Fund ETF focuses on replicating the S&P 500 by investing in all companies that are held within the index. VOO is a market capitalization index which means it holds a higher percentage of largest companies in the U.S and a smaller percentage of the smaller companies. Below is the basic information for VOO.

Source: Charles Schwab & Co., Inc

The key takeaway from this index fund was the net expense ratio which was 0.05 percentage. Again, I looked into the 10-years performance return for this index and documented the finding in the table below.

Table 3 - VOO 10-Year Overall Performance With $10,000 Investment

Year

Returns

6/30/2016

$20,905.03

12/31/2015

$20,138.68

12/31/2014

$19,873.35

12/31/2013

$17,490.72

12/31/2012

$13,219.75

12/31/2011

$11,404.74

12/31/2010

$11,177.95

12/31/2009

$9,723.25

12/31/2008

$7,690.72

12/31/2007

$12,198.72

12/31/2006

$11,569.48

Again, I created another table to factor in what the true performance would be if the fees were included and subtracted from the return.

Table 4 - VOO 10-Year Overall Performance With $10,000 Investment & Fees

Year

Returns

Assumed Net Expense Ratio

Assumed Fees Each Year

6/30/2016

$20,905.03

0.05%

$10.45

12/31/2015

$20,138.68

0.05%

$10.07

12/31/2014

$19,873.35

0.05%

$9.94

12/31/2013

$17,490.72

0.05%

$8.75

12/31/2012

$13,219.75

0.05%

$6.61

12/31/2011

$11,404.74

0.05%

$5.70

12/31/2010

$11,177.95

0.05%

$5.59

12/31/2009

$9,723.25

0.05%

$4.86

12/31/2008

$7,690.72

0.05%

$3.85

12/31/2007

$12,198.72

0.05%

$6.10

12/31/2006

$11,569.48

0.05%

$5.78

Total Fees

$77.70

Net Return Through 2016

$20,827.33

Looking at Table 4, I made the same assumption as I did for DNP. I assumed the net expense ratio was 0.05% for the last 10 years and the annual fees each year based on the net expense ratio.

Finding Results

After looking into these two funds, I found that the DNP fund provided a return of $29,608.44 while the VOO index fund provided a return of $20,827.33 for the past 10 years. By calculating the next return of each fund, the numbers showed that DNP fund outperformed the S&P 500 index fund by $8,781.11. The flaw in my finding, however, was the assumption I made in the fees. While it is quite amazing the fees of DNP compared to the S&P 500, the high dividend income yield of DNP helped overcome the high fees. The second flaw in my finding was that I only looked at the past 10-years performance which does not provide a clear indication if a high income fund truly outperforms S&P 500 index fund.

Total Performance Results Since 1987

To gain greater insight into how DNP Select Income Fund performed since it was founded in 1987, I calculated the total return of DNP versus the S&P 500 from 1987 to 2016. The results of the finding can be found here. If you had reinvested your dividend and invested all your extra income back into the two funds minus all the fees, the results showed that DNP clearly outperformed since 1987. From my documented calculation, the total returns from 1987 to 2016 for DNP would have been $106,540.87 versus S&P 500 total return of $82,273.28 during the same time period. Now, there are a few assumptions I made while calculating the total returns of each fund. The first assumption I made was again the net expense ratio from 1987 to 2016. I assumed 1.02% fee for DNP and 0.07% for the VOO. The second assumption I made was the annualized return of the S&P 500. I found my annualized return of the S&P 500 from 1987 to 2016 by using Moneychimp.com S&P 500 annualized return calculator. From 1987 to 2016, S&P 500 annualized return was 7.28%. From the information I gather and simple math, I was able to calculate the net return for both S&P 500 and DNP from 1987 to 2016.

Conclusion

From my findings above, it can be concluded that the DNP Select Income Fund outperformed the S&P 500 index fund in the last 10 years as well as when it was first founded in 1987 to 2016. I challenge the reader to take a closer look at income funds and see if you agree with my findings.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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