“Safe 21% Income Fund Goes Ex-Dividend: Buy Now”

This ad is from Bryan Perry’s 25% Cash Machine, which I haven’t written about very often — it’s an income-focused letter, but a bit more aggressive than some of them (thus, the 25% Cash Machine title, which clearly stokes heartier fires than, for example, Tom Dyson’s 12% Letter, though their aims are often similar).

But lots of folks have been asking about his latest round of ads, so I thought I should give it a look again. Here’s what he promises:

“Bryan Perry here, and this must be one of the biggest and safest paydays I’ve seen in years.

“One of the country’s highest-rated and little-known income funds is about to go ex-dividend. The fund pays out 21% annually and has a long-term track record for continuous payments.

“You must add this one to your holdings now.”

Nothing wishy-washy there, eh? What else do we learn about this “income fund?”

“Without getting too technical, the fund is able to deliver a 21% annual yield by following a proprietary dividend-capture methodology that:

“Maximizes the amount of distributed income.

“Identifies potential dividend increases and capital gains light-years ahead of the market.

“Surprisingly, it’s able to do this not by owning the market’s riskiest stocks, but by owning the market’s safest ones—financially solid companies whose incomes and cash flows are rising.”

OK, so I think I know who he’s talking about … but let’s get a few specific clues, just to be sure:

“it’s no surprise that the fund is up 60% since March 9.…

“80% of the companies held in the fund have recently raised their dividends,

“40% of the companies that it is invested in have a single-digit P/E,

“The fund is diversified in 125 companies and 20 countries, and

“The fund shifted from quarterly to monthly payments.”

So … who is this mysterious little income fund? Well, you could always subscribe to the 25% Cash Machine if you want the official answer, but I can tell you — free, naturally — that it almost has to be …

Alpine Total Dynamic Dividend Fund (AOD)

This is a closed-end fund, and it does have a high monthly dividend, with a strategy that relies on dividend capture and rotation of holdings to increase dividend exposure (the short and incomplete explanation of that? They hold a stock until it goes ex dividend, then sell it and move to another stock about to go ex-div, then go back to the original stock for the next quarter … exhausting, really.)

Perry has loved the Alpine funds for years — I wrote about his teasers for these closed-end and mutual funds and their dividend capture strategy (he called them “Dividend Doubling Dynamos” back then) in December of 2007, you can see that article for a bit more detail on the strategy they use, if you like, I won’t go into too much depth here — and Alpine also explains that this isn’t just a dividend capture strategy (they also go after special dividends, dividend growers, and undervalued yield stocks), but they explain that “capture” part of it on their website here.

And yes, the other numbers match up nicely, so I’m quite certain this is his pick right now as it has been many times before during this fund’s relatively short life — it pays monthly, but declares the dividend quarterly and recently declared that the next three dividends will all be the same amount as in the prior quarter, which is probably heartening to investors. If you’re interested in this kind of management strategy, Alpine also offers several other funds — they’ve got three closed end funds (in addition to this general fund there’s a real estate and, nominally, a “global” version), and a slew of regular mutual funds that they manage.

Since this is a closed-end income-focused fund, it’s important to pay attention to not just the distribution rate, but the premium/discount to the net asset value. Closed end funds can trade at any price on the open market, unlike mutual funds they do not have to hew closely to their net asset value, (the value, calculated daily, of their current portfolio divided by the number of shares). In AOD’s case there have been wild, strong swings from discount to premium and back again … and right now, the shares trade at an uncharacteristically high premium to their net asset value. As of the close on Friday the fund had a NAV of $6.39, and as I type this it’s trading at $7.25, so that’s a premium of 13.5% over the real value of the shares.

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People are willing to pay that premium because they like the AOD strategy and the high income (the shares are up slightly, so the indicated yield is now down to about 19%), but do keep in mind that this fund can see exaggerated moves based on sentiment changes — when the world was falling apart last Fall, the fund traded at a discount of better than 10%, then when optimism returned, albeit briefly, they got to a 15% premium in January, then back to a discount during the February and March low period. So holding these shares can give you a bit of heartburn, though so far they have been able to keep the dividend steady, and certainly there’s something to be said for a 19% dividend, perhaps even if you have to pay steep management fees and risk a high fund premium to get it.

Then again, if this Summer shows us the stock doldrums that many folks are expecting, maybe you’ll get a chance to get interested in this fund when it’s trading at a discount to its assets — certainly, past wide swings in both directions indicate that there’s a good chance for a better deal in the future (and we’re right in the middle of this runup to a big premium — just a few weeks ago the shares traded at a much smaller 5% premium).

Closed end funds can be a bit manic-depressive, gaining huge premiums when folks are excited about them and about the market, and sinking to steep discounts when investors freak out about bad news or are depressed about market prospects … and of those two extremes, I think it’s safe to say that it’s better to buy when others want to sell — that is, if you’ve researched the fund, you’re sold on the strategy, and you think management’s going to perform well.

So … on the plus side, they seem to be able to keep churning out the income using their dividend growth strategy and their holdings rotation across a very diversified portfolio to maximize dividends, even with many “blue chip” companies cutting payouts, and the fund is not currently leveraged to any significant degree (like many closed-end funds, they are allowed to borrow up to 33% to boost returns — but, also like many funds, the supply of leverage dried up last Fall, and investors started wanting more conservative positioning, so they are down to a very low percentage, in the single digits, as of the last report I saw).

On the negative side, there is an expense ratio of well over 1% — not crazy high, but certainly much higher than many mutual funds, the shares trade at a steep premium right now over their asset value but often swing to a discount based on investor sentiment or performance, and they trade a lot (turnover is over 400%, thanks probably to the rotation strategy), which I’ll guess might have an impact on tax implications for shareholders, though I haven’t looked into that … and if the credit markets eventually return to the point that it’s reasonable for closed-end funds to “lever up” again, Alpine could conceivably get a boost from that (or get clobbered, since leverage amplifies returns both up and down).

Oh, and to go along with all that dividend income, you’ve got capital losses — the net asset value has averaged a loss of almost 20% a year since inception, which is not necessarily dramatically worse than an index fund for this time period, but is nonetheless a significant counterpoint to that big dividend income.

So … are you looking for a closed end fund with a nice, hearty dividend? Lots of newsletters were touting the steep-discount funds last Fall as a saver way to get into the market and get decent income during the crash, but you’ll see far fewer of them touting closed end funds that trade at a premium — then again, this has been a Perry favorite almost since the fund was launched (about 2-1/2 years ago), so we can certainly admire his consistency. If you’ve got an opinion on Alpine’s funds, or on the “dividend capture” strategy … or about competitors who might do it better, please let us know with a comment below.

And if you’ve ever subscribed to the 25% Cash Machine, your fellow investors want to know what you think — share your opinion in a quick-and-easy review by clicking here — or check out the other reviews of income-focused newsletters here to see if you’ve anything to learn … or add. Thanks1

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