Funds For The Dividend Junkie
Invest in a portfolio of dividend-paying stocks, and you can expect four dividends a year from each. Put your money in one of the new, so-called dividend capture funds, and you get the equivalent of six dividends a year. With projected yields of 10%, it's no wonder they're a hit. Four such closed-end funds totaling $12.8billion have launched in the last four months, and five more are in line to go public.
Financial experts say these funds are a good idea, though the returns are likely to be more volatile than those of bond funds. "As long as people are aware of the risks, it's a perfectly valid investment," says Robert N. Gordon, president of Twenty-First Securities in New York. Adds Roger Nusbaum, a money manager at Your Source Financial in Prescott, Ariz.: "Used in moderation, these are a great tool for a diversified portfolio." Nusbaum uses them in the income-producing parts of clients' portfolios alongside funds that invest in real estate and those that boost yield by selling call options.
Although these closed-end funds are new, institutional investors have successfully plied the dividend-capture strategy for years. The idea is to maximize income by trading stocks around their dividend dates. The funds hold the stocks for only 61 days, just long enough to qualify for the 15% maximum tax rate on dividends. (They typically buy in advance and sell right after the dividend is paid.) By rotating among stocks, they collect six dividends instead of just four in any 12-month period. The funds also seek companies issuing special one-time dividends.
SCOURING THE GLOBE
The $4 billion Alpine Total Dynamic Dividend Fund, run by Alpine Woods Capital Investors in Purchase, N.Y., is the most straightforward of the new offerings. The fund seeks stocks from all over the world with high and increasing dividends. Although the new closed-end fund has been in operation for less than two months, it announced distributions of 18 cents a share for March, April, and May. That's an annualized yield of 10.3%, at the fund's current share price of $21.
One of the newer funds, the $5.5billion Eaton Vance Tax-Managed Global Diversified Equity Income Fund (exg ), invests in a mix of U.S. and foreign stocks with an emphasis on high-dividend payers. To boost the yield even more, the fund also sells call options on the Standard & Poor's 500-stock index and some foreign stock indexes. The gains on the options are partially offset by occasional losses on the stocks, which sometimes fall in price after the dividend.
Boston-based Eaton Vance's $2.6billion Tax-Managed Diversified Equity Income Fund (ETY ), launched last November, uses the same strategy, though the older fund invests only in U.S. stocks. That fund has already paid one quarterly dividend of 46.25 cents, an annualized yield of more than 9%.
The dividend hunt demands more trading than a buy-and-hold portfolio, yet the management fees are lower than those on the average equity mutual fund. There are, however, less obvious commissions and related trading costs. They're not spelled out like management fees, but they take away from the total returns.
As tempting as the new funds may be, think twice before buying a closed-end fund at an initial public offering. From the get-go, they're always selling at a premium to their net asset value, because underwriting fees and commissions are baked into the share price. Most closed-end funds soon lose that premium. Given the busy calendar of offerings, it's a good bet most will be selling at discounts by the fourth quarter. Better to do your shopping then.
By Aaron Pressman