The John Hancock Premium Dividend Fund (NYSE:NYSE:PDT) is a closed end fund that "seeks to provide high current income consistent with modest growth of capital” according to the fund manager. The fund opened in December 1989 and has paid monthly dividends every month since February 1990. Total assets are $1.1 billion and net assets are $747 million. The expense ratio is 1.52%. The fund utilizes 34% leverage to enhance yield, which also increases expenses, volatility and interest rate sensitivity. As of 8/5/2019 the fund share price is $17.32 and the yield is 6.79% based on the monthly dividend of $0.098 per share. The fund utilizes a managed distribution policy which means that the fund managers establish a regular monthly dividend amount based on forecast fund earnings. In addition to the monthly dividends the fund paid an extra capital gain dividend every December since 2002.
The fund holds 112 issues comprised of 50% preferred stocks, 39% common stocks and 11% corporate bonds. The fund is most heavily invested in Utility companies, followed by Financials, Energy, Communications Services, and Real Estate companies. The common stocks in the portfolio provide an opportunity for the fund to grow investor’s capital. The nations of issue are 86.4% USA, 6.1% UK, 3.2% Canada, and the remainder from a few western European nations.
Preferred stocks can be a very reliable source of dividend income. Preferred stocks are issued with a stated dividend amount and payment frequency and they can be cumulative or non-cumulative. Cumulative Preferred stocks impose a restriction that the issuing company cannot pay any dividend to regular shareholders unless all of the dividends that are due to the preferred shareholders have been paid. Cumulative preferred stocks issued by companies that have a long uninterrupted history of paying dividends to shareholders are an extremely reliable source of dividend income because the company would break its record of paying uninterrupted dividends to regular shareholders if it delayed paying a dividend to the preferred shareholders.
PDT is one of the best high income funds because it is one of very few that have consistently preserved and grown shareholder capital. As I discussed in Income Investing Strategies To Preserve Principal many high income funds shrink investor capital over time. If an investor invested $1000 in PDT at fund inception December 1989 and took all of the dividends as income, the original investment would be worth $1443 today, a CAGR of 1.24%, and the investor would have received $2391 in dividend income over the years, an average of $80.69 per year.
There are other excellent closed end high income funds that invest in preferred stocks but very few of them can match PDT's history of preserving and growing investor capital without reinvesting any of the dividends.
The Problem with PDT
Shares of closed end funds trade on the stock market at a price that may be higher or lower than the net asset value ("NAV") per share. As of 8/5/2019 PDT shares are trading at $17.32 which is 12.54% higher than the net asset value per share of $15.39, which is relatively expensive considering that over last ten years the fund traded at an average discount to NAV of 2.94%.
The problem with PDT is that investors like it so much that they have bid the market price up to a 12.54% premium over the NAV. It is still a very good income investment that pays 6.79% in monthly dividends plus an additional December dividend, and I believe that if you buy it today you will enjoy reliable dividend income that will slowly grow over time. But I do expect that the 12.54% premium will eventually decline which will reduce the market value of your investment. As a long term buy and hold investment I have no problem recommending PDT today. If you are a trader you should consider that the fund is selling at a historically high premium over NAV and that the premium may shrink before you decide to sell.
HTD - A Better Value?
John Hancock also offers The John Hancock Tax-Advantaged Dividend Income Fund (NYSE:HTD), which has long been one of my favorite income funds. The fund seeks a high level of after-tax total return from dividend income and capital appreciation by targeting securities paying dividends that qualify for favorable federal income tax treatment, with emphasis in the high paying utilities sector. The fund has total assets of $1.35 billion and net assets of $919 million. Management fee and other expenses are 1.34%. The fund utilizes 31.8% leverage. The recent market price per share is $24.97 which is a 1.77% discount to the NAV of $25.42. The ten year average premium/discount is a 7.9% discount. The fund pays monthly dividends of $0.138 twelve times per year in accordance with a managed distribution plan which results in a yield of 6.63%, which is only slightly less than the 6.79% yield provided by PDT . Since 2013 the fund has paid two dividends in December and no dividend in January.
The fund holds 110 issues which are 52.4% common stocks, 37.6% preferred stocks, 9.6% corporate bonds 0.4% short term investments. The nations of issue are 89% United States, 5.5% UK, 2.3% Canada, with the remainder from a few western European nations.
If an investor had invested $1000 in HTD in February 2004 and taken all of the dividends as income, their original investment would be worth $1248 today, a 1.44% CAGR, and they would have collected $1128 in dividends, an average of $74 per year.
PDT is a great income fund that has a long history of providing reliable monthly income while preserving and growing investor’s capital. Because it is so reliable investors have bid the share price up to a premium of 12.54% which some investors may be unwilling to pay. HTD is a great alternative income fund that offers exposure in the same sectors and provides very similar benefits as PDT, and can be purchased at a discount to NAV.
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Disclosure: I am/we are long HTD. 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.