Wednesday, July 31, 2019

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: 6.2%

Delaware Inv Div & Inc (DDF)
The Fund seeks current income and capital appreciation through investment in equity and non convertible debt securities
- Distribution Yield: 7.2%

Eaton Vance Tax Adv Global Div Opps (ETO)
The Fund seeks high total return through investment in global common and preferred securities.
- Distribution Yield: 8.6%

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: 10.7%

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: 8.3%

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:

Commerce Bancshares (CBSH) subsidiary banks provide services to individuals and businesses via 204 branches and 403 ATMs in Missouri, Kansas, Illinois, Oklahoma and Colorado at Dec. 31, 2012. The company has paid a cash dividend to shareholders every year since 1936 and has increased its dividend payments for 50 consecutive years. Yield: 1.7%

Lancaster Colony (LANC) is a diversified Ohio-based company that manufactures and markets specialty food products for the retail and foodservice markets. Yield: 1.7%

Stanley Black & Decker Inc. (SWK) is a diversified global provider of hand tools, power tools and related accessories and systems resulted from the March 2010 merger of Stanley Works and Black & Decker. Yield: 1.8%

Lowe's Companies, Inc. (LOW) sells retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada. Yield: 2.1%

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. Yield: 2.0%

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. Yield: 2.1%

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: ETO, GLQ, CINF

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