Equity CEFs: Where's The Beef In The Delaware Dividend & Income Fund?

About: Delaware Investments Dividend&Income Fund (DDF), Includes: CLM, CRF, SPY
by: Douglas Albo

Meatless meat companies, like Beyond Meat, seem all the rage on Wall Street right now, but will investors eventually ask "where's the beef?"

This got me thinking about an equity CEF that has acted like a meatless company IPO, and one could definitely ask the same question.

Because in the universe of equity CEFs, funds aren't suppose to skyrocket in price unless they have the NAV meat to back it up, and this fund hasn't shown it.

Don't get me wrong, the Delaware Dividend & Income fund has been a great performer longer term, but since its "IPO" a year ago, it's underperforming NAV should not be supporting a 27% market price premium.

It's hard to give any credibility to any equity CEF market price when a relatively unknown fund like the Delaware Dividend & Income fund (DDF) ($13.75 market price, $10.81 NAV, 27.2% premium, 7.9% current market price) can completely become disconnected with its NAV, and in particular, its NAV performance, and skyrocket to the top of all the equity CEF market price performances over the past year.

Here's a one-year total return performance of DDF compared to the S&P 500 (SPY):

Chart Data by YCharts

No equity CEF comes even close to this one-year performance record and the vast majority of funds (CEFs, ETFs and mutual funds) have a tough enough time just trying to keep up with SPY. But it's when you look at a one-year NAV total return performance of DDF that you wonder why is this fund doing this?

The following table lists all of the equity CEFs I follow by their NAV total return performance between 5/11/2018 and 5/10/2019 (my spreadsheet tables come out every Friday), and though you can't make out the numbers due to how many funds are listed, this should give you a good idea of where DDF's NAV stands compared to the rest of the funds.

Here you can see that DDF is roughly one-third of the way down this list with an NAV up 3.5% over the past year including all distributions added back. In other words, while DDF's NAV has gained a measly 3.5% in a year, DDF's market price has gained 35%-plus (percentages are a bit different in the two tables above due to the SPY comparison showing a percentage gain as of yesterday, 5/15/2019).

This means that DDF's current market price of $13.75 is almost $3 higher than its current $10.81 NAV. That's a completely ridiculous valuation for a fund that has actually lost NAV over the past year. Why is this important?

Because the NAV is the all beef, all meat patty of the fund. This is what you would get back if the fund had to liquidate but more importantly, this is the source of the fund's distribution. Though most investors in CEFs think the market price yield is what the fund is paying, that would be a wrong assumption.

The NAV pays the distribution, and in the case of DDF, the NAV has dropped from $11.49 a year ago to $10.81 as of yesterday's close. Add back DDF's distributions, and yes, the NAV is up a bit year over year, but look how many funds in the table above are doing much better.

So why has DDF's market price skyrocketed over the past year? It wasn't always that way. For most of its existence, DDF has remained in obscurity even as it steadily grew its NAV with a leveraged portfolio of value stocks, REITs and high-yield corporate bonds. But all the while, the fund typically traded at a wide discount (five-year premium/discount graph below) because it offered a conservative 5% or so yield.

But on March 1, 2018 (pretty much where the discount starts turning up in the above graph), the fund sponsor and the fund's investment manager (Macquarie) adopted a 10% NAV distribution policy which more than doubled DDF's market price yield to around 11.4% (because DDF was trading at a -9.4% discount at the time). It was a new beginning for DDF, an IPO if you will, and it has been off to the races ever since.

Will A 10% NAV Distribution Policy Turn DDF's NAV Into Ground Beef?

NAV distribution policies, calculated with an average three-month trailing NAV price, are a great idea and more and more fund sponsors should be looking into this because not only does it remove any unexpected distribution cut which obviously can affect a fund's market price, but it also ensures that a fund's NAV yield doesn't keep rising with an eroding NAV.

But a 10% NAV distribution policy is very aggressive, even for a leveraged CEF. I would much rather see a 7% to 8% NAV distribution policy because it's easier for the NAV to cover and still be able to grow the NAV. Because what happens if you have too high of an NAV yield? The NAV erodes, and as we know, an eroding NAV means bad return of capital in the distribution, because the less NAV you have to derive the fund's distribution, the harder it is for the fund to cover the next distribution. If you don't understand this simple concept, then you shouldn't be investing in high yield (10%+) CEFs.

Based on DDF's 3.5% NAV performance over the past year, well below the S&P 500's 7.6%, a 10% NAV distribution policy means DDF's NAV is already eroding, something that I said would happen in this article from last August, Equity CEFs: Liberty And Independence In A Delaware CEF when DDF was at only an 8% market price premium.

At the time, DDF's NAV was $11.66 and today it is $10.81 even though DDF's market price continued to go up from $12.59 last August to $13.75 today (not even including distributions) and a 27% premium. How insane is that?

I said in the article...

The problem will be when DDF starts seeing NAV erosion, which I believe will be inevitable with that much higher NAV yield it has to cover. And as we've seen from DEX, I don't think investors will be too happy when they start seeing their distribution go down.

Boy was I wrong about investor's not being happy (even if blind about what was happening). DDF's market price has just continued to go up even though I was completely right on the direction of its NAV. Certainly, the past year has seen a major up, then down and up market, which has affected all equity CEF NAVs, but make no mistake, a 10% NAV yield is not easy to cover, and anyone who buys DDF here thinking their getting a great 7.8% market yield plus appreciation when the fund has to pay a 10% NAV yield, is not very market savvy.

Alternatives To DDF

In fact, if a high market yield is your goal then why not look at the Cornerstone funds (CRF), $11.66 current market price and (CLM), $11.91 current market price?

I'm not necessarily a fan of the funds but their NAVs have actually performed better than DDF's over the past year. And if you don't care about an eroding NAV, and certainly the Cornerstone fund's NAV's will erode since they have an even higher 21% NAV yield, then you can get 20% market yields! How do you like them apples?

Note: I have opened a small position in both CLM and CRF over the last trading day

CRF and CLM trade at premiums too, though much lower than their five-year average. Currently, both funds are coming down because of an expected Rights Offering that is typically announced in June of each year at a premium to NAV. Though this helps build back the NAV to a degree, it also dilutes the shares.

Still, if you don't care about market price premiums or NAV erosion, then CRF and CLM at 6% to 7% premiums (about where the Rights Offering would be priced) are much more compelling in my opinion right now.


DDF is a very small fund and a few large holders appear to be bidding up the fund's market price while unsuspecting small investors continue to buy at the ask. At some point, a large holder will pull the trigger but it hasn't happened yet (in fact, there's 19,000 shares bid at this moment).

Who would be bidding 19,000 shares (about its daily average volume) at $13.72 when DDF's NAV is $10.81? I have no idea but it's obviously someone who wants buyers to believe that DDF represents more than ground beef and is more in the fillet mignon category. Unfortunately, DDF's NAV performance over the past year says otherwise.

Disclosure: I am/we are long SPY, CRF, CLM. 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.