JRI boosted its monthly distribution rate by +10.3%.
The distribution appears supported by the NAV, for now.
This is the fourth CEF that has increased its distribution in our Income Generator portfolio this year.
Author's note: A modified version of this article was first released to CEF/ETF Income Laboratory members on November 5, 2019.
Nuveen Real Asset Income and Growth Fund's (JRI) announced a +10.3% distribution increase, as a result of its adoption of a managed distribution policy program. In our Income Generator portfolio, we hold JRI at a ~5.5% weighting, and will look forward to an increased distribution of $0.1170 this month (ex-date November 14th), up from $0.1060 last month.
Nick last covered JRI for us recently here: JRI: Attractive Discount With Defensive Cash-Flow Holdings (public link), so I'm not going to go into detail into recapping the fund. Briefly, JRI is a closed-end fund that invests in a mix of equity and debt securities primarily invested in the infrastructure, REIT and utility sectors.
Here's the press release again, explaining the purpose of the managed distribution program:
The goal of the fund’s managed distribution program is to provide shareholders relatively consistent and predictable cash flow by systematically converting its expected long-term return potential into regular distributions. As a result, distribution sources may include net investment income, realized gains and return of capital.
How sustainable is the new distribution rate?
To be honest, I was a little confused when I first saw the announcement because most equity funds already employ a managed distribution program. For the last several years, JRI's distribution has been supplemented by around 10% of ROC.
I take the above blurb to mean that the fund will be more aggressively converting its capital appreciation to distributions as well (possibly by realizing the gains), but we'd won't know for sure what this program exactly entails until a year or so has passed. For example, if the NAV goes lower, will the distribution be reset at a lower rate, and vice versa?
In Nick's article on JRI (which was written before the announcement of the latest distribution boost), he wrote:
The NII coverage for their latest Semi-Annual report isn't all that bad either, coming in at 72%. Remember, JRI still has exposure to equities so we can expect that a portion of their distribution is expected to be covered through capital gains too.
At the new rate of $0.1170 per month, the NII coverage falls from 72% to 65%. Some investors who may not be as familiar with CEFs may ask, why would a fund that is not currently covering their dividend further increase their distribution rate?
The answer, as Nick alluded to above, is that as a hybrid fund with part of its allocation to equities (about 45%), JRI will use capital appreciation to fund a portion of their distribution.
JRI's NAV has recovered to where it was at the start of 2018 and is currently trending up, so it would appear that this new distribution is supported for now, and is probably what gave management confidence in raising the distribution.
As of November 5, 2019, JRI yields 7.80% on market price, and 7.10% on NAV. With an attractive discount of -9.00%, I think this fund is still one of the rare quality CEFs that can still be had a decent discount. (November 30 update: JRI's discount is currently -7.96%, which is still quite attractive in my opinion).
Status of JRI in our Income Generator portfolio
Having purchased JRI at $13.39 in our Income Generator portfolio on December 28, 2018, we are currently enjoying total returns in excess of +40% since that buy point. Part of this is due to the power of mean reversion of CEF premium/discounts, as JRI had a massive discount of -17.84% when we purchased it.
(Notably, JRI has substantially also outperformed Reaves Utility Income Fund (UTG), the fund we had swapped out of to make room for JRI at that time).
Currently, JRI holds about a ~5.5% weight in our Income Generator portfolio. We have our "buy under" premium/discount target at -12%, and a "sell above" premium/discount target at -5%. So with its current -7.96% discount, it is rated as a "hold" in the portfolio. For reference, the 1, 3 and 5-year average discounts are -12.37%, -11.21% and -10.32% respectively. Nevertheless, I still think that the current discount is still quite reasonable for anyone looking to initiate or add to the fund, especially when compared to many other CEFs in the same sectors that have been bid up to high valuations.
We have also assigned JRI with a risk rating of "8" on a 10-1 scale (10 highest, 1 lowest) where the S&P 500 would be rated as a "7", a corporate bond fund as a "4", and cash "1". The reason I think that JRI is slightly more risky than the S&P 500 is because of its sector focus.
As a reminder, this is the fourth CEF in our Income Generator portfolio that has announced an increase of distribution this year (the others are PCI at a ~17% allocation, HYI at a ~15% allocation and BDJ at a ~9% allocation), while we also have had zero distribution cuts in this portfolio this year. These distribution increases, together with our ability to gain "free shares" using our unique "compounding income on steroids" strategy is what has allowed us to grow our income in the Income Generator portfolio by 21% year-on-year, and with a CAGR of +12.7% since inception at the start of 2017.
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Disclosure: I am/we are long THE PREMIUM PORTFOLIOS. 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.