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
You know, when I first read this teaser I couldn’t believe it could be AOD because the facts didn’t quite fit. So I spent a fair amount of time trying to find the “answer”, obviously being very interested in such a plum investment.
But this was pointed out here in early December in our very own forum (see post #4): http://oneguysinvestments.com/gumshoe/comments.php?DiscussionID=1619
I bought it in several installments through February with an overall average price of 5.65 and my yield is still over 25% even after they cut the dividend. Needless to say, I’m a very happy alpine camper (that’s strange, I hear yodeling).
But this is another example of poor timing by a newsletter writer. When I made my purchases, the discount ranged from 15% to over 20%. Combine that with the yield and it’s an outstanding investment. Someone in the forum recently asked for advice for a “safe” high yield investment. Unfortunately, while AOD isn’t bad, it’s no longer outstanding. The discount is gone (now a premium) and the price has advanced almost 30%. I wouldn’t buy it here, but I’m happy to hold it. That monthly dividend is swell. Just proves again that you can get better ideas and timing here……and free of charge. Don’t forget to sign up for the Gumshoe’s “Irregulars”…..worth every penny.
http://finance.yahoo.com/q/ta?s=AOD&t=1y&l=on&z=m&q=l&p=m200,m50,p&a=m26-12-9,r14,ss&c=
On first blush I’d say, what’s not to like? On 2nd blush that dawg-gone premium over 13% is too high by normal standards.
So my “seat-of-the-pants” strategy is to look more at the fundamentals here, & I must say this paragraph, if true, is the deal maker.
“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.”
Gotta like that analogy if quality of issues is your bag.
Good one Travis!
AOD Looks nice. But, noon has talked about the tax situation. In general to get the favored tax treatment an individual needs to hold his stocks for thirty days before and/or (I don’t know which) after the ex date.
Does this pass through and hence the dividends may not be qualified?
If you want 25% yield, try SFI preferreds. They are currently trading at about 8 and pay 2 bucks a year. They have recently come off of lows last fall of 2.50. You don’t get the qualified tax rate but you can hope to make a nice capital gain as they recover to near par.
I bought the open end fund ADVDX and it’s stays more or less near the lows, that’s not good. However, during the turmoil (I’m down 55% on that one) it always paid dividends.
Thanks for the job you do on these letters, certainly helps me to know the market better. This sounds like a winner, for sure when they drop back off premium as you suggest. In the past I have seen teasers suggesting that some California folks were making big returns by buying stocks with big dividends just before payout time and reaping the dividends and then rotating out just as this fund is. This fund is doing the work for you on the stocks.
I’m not sure I get how this works. If a $10 stock pays a $1 dividend, the price usually drops to $9 when it goes ex-dividend. Generally, a decent stock will come back up in price before the next dividend announcement, but if they buy it for $10, capture the $1 dividend and then sell it for $9 and move on, where’s the profit? What am I missing?
Here’s a recent article panning CEF’s as dividend plays. It specifically mentions AOD. I’m not sure I agree with the author’s conclusion. If you know how to trade, you like the fact that volatility is one component that drives the fluctuation between discount/premium. I’d much rather trade in and out of a fund that pays me nonthly as opposed to quarterly; and I’m sure you see why. But this particular fund has no real track record regarding its ability to sustain an up trend; and unfortunately you can’t purchase put options to protect the long position.
Anyway, here’s the link:
http://seekingalpha.com/article/135958-are-etfs-and-cefs-good-for-dividend-investing
This stock hit the market in January of 2007 at $20.00. It paid an annual dividend of $2.16 ($.18/month). The annual div is now $1.44. The stock is now in the low $7’s less than 2.5 years since inception.
At exactly what point in its history was this stock a good buy? As near as I can see from the charts, March of 2009 would have been a good time, but this was a good time for nearly everything.
Does anyone know when the tout began touting this stock?
At first I was intrigued by the idea of AOD. It could work I thought. Sure, right after having paid its dividend a stock falls. But a “quality” stock should recover soon after. So actuyally I still think the strategy of AOD should work. But now my point: If you compare AOD’s (admittedly so far rather short) chart to the S&P500 or the DJ World Index of which AOD’s usual holdings most probably are part of, you see that AOD has underperformed those two indices quite substantially over the “long” term. What does this mean? Although the dividend distributions of AOD look very compelling at first, it seems that AOD has so far not been able to trade its stock holdings in a way to recover the individual stocks’ fall after dividend payment. Or in other words: You get the dividends but you pay (at least partially) with stock price underperformance.
http://stockcharts.com/charts/performance/perf.html?aod,$DJW,$spx
Sure, with only about two years AOD is still a young investment vehicle and who knows how they manage their trades in the future. But as far as I am concerned I’d say it’s not (yet) what I expected.
Anything I missed here?
I’m sorry the chart didn’t work. 2nd try:
http://stockcharts.com/charts/performance/perf.html?AOD,$DJW,$SPX
Then use the slider at the bottom of the chart to zoom out and look at AOD’s whole life. –> Underperformance of about 10% so far.
Ok, the $-signs are ignored by the system. Insert them before DJW and SPX. Sorry for the hassle.
I think the idea of capturing ndividends in the way discribed is a hoax__or close to it. I’ve studied about doing this and I find it is impossible. Stocks, especially ones that pay high divs. on or right after the ex-date tend to decline by about the amount of the dividend. AOD does not show investors these transactions. They just want us to take their word for it. What they are really doing in this process is converting equity to dividends so they can pay a higher rate ie 21%. Dont be fooled.
Gumshoe: I was a poster in Yahoo’s AOD chatroom. There were those who loved the stock and would be pleased to accept this dividend for decades, regardless of stock value…They never drew or even thought of the NAV graph that would intersect the X axis in two or three years.
Per your comment on returning capital in the form of income, there is no doubt. As one of us anti AOD’s stated, “the dragon is eating its tail”.
I like the turn of phrase! Thanks.
AOD’s “great” yield comes from a plummeting share price. In March they cut their dividend from $0.18/month to $0.12/month. I bought some at the end of 2007 at nearly $19 it is now trading in the $7 range. Not pretty.
Best Wishes,
D4L
I watched Perry for quite a while and he moves in and out of basically the same stocks and funds. If you get a copy of his book: The 25% Cash Machine, probably still available at Amazon or your library, you can get a list of those closed-end funds and stocks. If I recall correctly he explains the economic conditions that cause him to rotate in and ou of certain sectors.
I got sucked into Perry’s 25% joke a couple of years ago, and it cost me about 20 grand. I don’t want to hear from or about Perry ever again!
I think some of you might be fussing this like 2 dogs worrying a dead rabbit around on the floor.
Yes AOD is ‘Down, down, down since it’s inception, virtually…Remember, the DOW peaked October 2007, and began it’s slide down to the Summer of 2008…Then it started to get nasty. So what didn’t go ,down , down down?
Traders are more narrowly focused to a particular stock, rather than
the overall trend….A stock can buck a trend for a variety of reasons….A trader profits from
accurately guageing the stocks response…Sorry…I don’t usually try to teach my Grandmother how to suck eggs….
Anyway….AOD, and others like it
de-leveraged this past year and a half…As did nearly every stock in every country with 2 nickels to rub together…I always cast an eye on the holdings…AOD isn’t bad
at all…As to dividend capture.
It does work…I’d rather someone else keep track of them…I do think it works best with foreign
stocks, that pay annually, or semi-annually….In practice
a high dividend payer, that pays once a year might represent dead money, better employed elsewhere until just before record date for
dividend qualification…Why not?
If I only own it for the yield,
and it’s pretty much dying on third
the rest of the time; Why hold it, unless it offers decent annual growth, or total return.
Actually I don’t consider AOD, a dividend
capture holding…AWP has that advertisment…But if AOD has the opportunity on occassion, it adds…
But as to AOD…I can show you dozens of similar “dissapointments”.
Nearly anything you bought the past year and a half is down, unless bought in Oct., Nov. “’08”; Or March “’09” lows….
That’s the law of the jungle, and the way the cookie crumbles,
thrill seekers…
I’ve been considering investing in AOD myself but the recent run up scared me a bit. There’s quite a few CEF’s paying in the 17-20% range right now from companies like PIMCO, Blackrock, Nicholas & Applegate, Evergreen…etc. so the payout isn’t over the top. However, Perry says that AOD recently went from a quarterly distribution to a monthly one; in reviewing AOD’s history it looks to me like they have always paid monthly so is AOD the correct fund?
I love high dividends too. In all this discussion, no one has suggested that high payers belong in tax deffered accounts. There is an esxception.” Special” dividend payers can fit into your regular accounts. They become part of shedule D reporting. Do you have offsetting losses from the great bust? Just kidding. We all probably do. Check with your accountant. Reminder, you do not have to take disperssal from IRAs this year. I DRIP and smile. Herach.