Wednesday, July 13, 2016

High-Yield Managed Distribution Policy Funds

Exchange traded funds (ETFs) and closed-end funds (CEFs) are composed of many different individual securities. This usually results in uneven dividend distributions. Some funds have tried to address this with a managed distribution policy. In short, a managed distribution policy is management's commitment to make a fixed periodic dividend payment.

How Managed Distribution Policies Work

Since many funds distribute most of their income to shareholders in order to avoid taxation, funds with a managed distribution policy sometimes have cash left over at year-end that needs to be distributed. This is is normally done as a "special" one-time dividend. However, if the fund generates insufficient cash to cover the dividend, the fund is forced to sell some investments to cover the cash short-fall. In turn, this portion of the short-fall is treated as a return of capital and the fund now has lower assets to generate future income.

Advantages of Managed Distribution Policies

According to a Gabelli Funds report, managed distribution policies offer several advantages, including:

1. Lower difference between the fund’s market price and its NAV per share.
2. Provides support during periods when the stock market is in a decline.
3. Provides a measurable performance target for the investment adviser.

Below are a few high-yield funds that have a managed distribution policy:

BlackRock En Capital&Inc (CII)
The Fund seeks current income and capital gains through investment primarily in equity securities and through utilizing a covered call and options strategy
- Distribution Yield: 8.8%

Delaware Inv Div & Inc (DDF)
The Fund seeks current income and capital appreciation through investment in equity and non convertible debt securities
- Distribution Yield: 6.4%

Eaton Vance Tax Adv Global Div Opps (ETO)
The Fund seeks high total return through investment in global common and preferred securities.
- Distribution Yield: 10.0%

Clough Global Equity (GLQ)
The Fund seeks a high total return through investment in equity, corporate and sovereign global investment grade securities and through utilizing an options strategy.
- Distribution Yield: 12.9%

Nuveen Tx-Adv TR Strat (JTA)
The Fund seeks to achieve a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation.
- Distribution Yield: 9.1%

A managed distribution policy may create confusion regarding the true current yield since the reported yield includes the return of capital portion.

If you are looking for a sustainable and growing dividend, you may want to consider some blue-chip dividend stocks such as these with a Free Cash Flow Payout less than 50%, 50+ years of consecutive dividend increases and a 2%+ yield:

Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 53 consecutive years. Yield: 2.0%

Parker-Hannifin Corp. (PH) is a global maker of industrial pneumatic, hydraulic and vacuum motion/control systems, including related pumps, valves, filters, hoses, etc. Its products are used in everything from jet engines to autos, trucks and utility turbine. The company has paid a cash dividend to shareholders every year since 1949 and has increased its dividend payments for 60 consecutive years. Yield: 2.3%

Dover Corp. (DOV) manufactures a broad range of specialized industrial products and sophisticated manufacturing equipment. The company has paid a cash dividend to shareholders every year since 1947 and has increased its dividend payments for 61 consecutive years. Yield: 2.4%

Genuine Parts Co. (GPC) is a leading wholesale distributor of automotive replacement parts, industrial parts and supplies, and office products. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 60 consecutive years. Yield: 2.4%

Cincinnati Financial Corp. (CINF) is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations. The company has paid a cash dividend to shareholders every year since 1954 and has increased its dividend payments for 56 consecutive years. Yield: 2.5%

When investing in a fund with a managed distribution policy, it is important not to confuse predictable cash flows with assured cash flows. A managed distribution policy means that the funds management is making an attempt to smooth out cash flows, but there is no guarantee they will be successful.

Full Disclosure: Long ETO, GLQ, ITW, PH, CINF, GPC. See a list of all my Dividend Growth Portfolio holdings here.

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Tags: CII, DDF, ETO, GLQ, JTA, ITW, PH, DOV, CINF, GPC,

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