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Here's How We Get Free Shares

Mar. 04, 2021 9:55 PM ETEagle Point Credit Co LLC (ECC), OCCI
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  • Our Tactical Income portfolio gained +10% of free shares of ECC in 2 months.
  • This was equivalent to DRIPing 1 year's worth of the fund!
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Here's How We Get Free Shares

We made another great move on our swap strategy of "compounding income on steroids" that saw us gain 10% of free shares in ECC in only two months' time!

These alerts are exclusive to members of the CEF/ETF Income Laboratory. However, we are sharing the trade from last Monday (February 22) to show how easy it is and how others can replicate the same success.

Not to mention, this trade was a continuation of gaining free shares two months prior to this as well!

Here was our trade alert:


Tactical Income-100 portfolio

Two months (Dec. 18, 2020) ago, we did this...

Sold: Eagle Point Credit Company (ECC) at $10.14 (~7% allocation, 1110 shares)

Added: OFS Credit Company (OCCI) at $12.07 (~7% allocation, 930 shares)

Today, we're swapping back to grow our share count in ECC by +10% in 2 months.

  • Sold: OFS Credit Company (OCCI) at $15.01 (~sold 12% allocation, 1216 shares)
  • Bought: Eagle Point Credit Company (ECC) at $11.48 (~10% allocation, 1220 shares)

With CLO equity prices increasing significantly since our last trade, together with compulsory DRIPs from three quarters of OCCI's distributions, our OCCI position had grown to nearly 12% of our entire portfolio. This was probably too high a level for a single position in a CLO equity fund (the riskiest tranche of the CLO structure), hence it made sense to drop the allocation back to the ~10% level. Remember, we also own a ~5% allocation to Eagle Point Income Fund (EIC), which is mostly focused on CLO debt but which also has a small CLO equity position.


Data by YCharts

How did we arrive at the +10% increase of ECC shares? Two months ago, we sold 1110 shares of ECC at $10.14 ($11255) to buy 930 shares of OCCI at $12.07 ($11225). Today, we're selling those same 930 shares of OCCI at $15.01 ($13959) to buy 1220 shares of ECC at $11.48 ($14006). Hence, we got 110 shares of ECC "for free", equivalent to DRIPing over one year's worth of distributions from the stock! See this guide on how our "double compounding" strategy works: How Would You Like Your Free Shares To Be Served? (Double-Compound Your Income!).

Since April 2020, this is how our share counts of the ECC/OCCI pair have grown:

  • ECC: 860 (Apr. 21, 2020) --> 1060 (Jun. 11, 2020) --> 1110 (Dec. 16, 2020) --> 1220 (Jan. 22, 2021)
  • OCCI: 750 (May 28, 2020) --> 785 (Jun. 24, 2020) --> 930 (Dec. 18, 2020)

This means we have grown our position in ECC by +42% in less than one year, purely through CEF rotation. Yes, you read that right, an outperform of +42% vs. purely buy-and-hold. Remember, no DRIPing was required at any time as all distributions were received in cash

The reason for swapping from OCCI to ECC was simple: valuation. As you will see from our CEF Watchlist, OCCI's +6.79% premium puts makes it over 10 points more expensive than ECC which sports a discount of -3.92%. Whereas historically, ECC had been the more expensive fund, so we thought we would harvest this differential now and grab our +10% of "free shares" of ECC with this swap. Note that these premium/discount are computed from the latest NAV numbers from the end of January for both funds, so are comparable (at other times, you have to be careful when you only have the latest NAV update for one of the funds, with the other being more stale). This is why I always remind our members: valuation matters when buying CEFs - even for CLO funds!  

We track the CLO pricing because Morningstar/CEFConnect does not update the pricing when new NAV reports are posted monthly. Yet another feature worth considering for any CLO CEF investor!


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Stanford Chemist, Nick Ackerman, Juan de la Hoz and Dividend Seeker

Analyst's Disclosure: I am/we are long ECC.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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