Liberty All-Star Equity Fund (USA) — a recent addition to our list of recommendations — is a high-yield closed-end fund. It is a stock fund with assets divided between five different money managers, notes Tim Plaehn, editor of The Dividend Hunter.
The dividend policy is to pay out a quarterly dividend that equals 2.5% of the net asset value per share. In basic terms, the USA dividend gives a 10% yield, and the dividends consist primarily of capital gains generated by the fund managers.
The fund was launched in 1986. It has performed exceptionally well since the bottom of the 2008-2009 financial crisis bear market. Since March 1, 2009, the fund returned 15% per year and 20% per year with dividends reinvested.
I think the fund has a very valid strategy, with the potential for attractive returns. The fact that the fund has been in business for 35 years tells you the fund has achieved long-term success.
By its nature, our Dividend Hunter strategy leans heavily towards value stock investing. The Liberty All-Star Equity fund has two managers (40% of the portfolio) with value investment styles. The other three (60%) managers employ large-cap growth-focused investment strategies.
This fund gives the Dividend Hunter exposure to stocks that have driven the stock market higher for the last decade. Net assets for USA are $1.6 billion, which is large in the CEF world.
Dividend announcements come out around the tenth day of January, April, July, and November. Payment dates are two months after the declaration dates, with the ex-dividend coming about two weeks after the declaration dates.
Since the dividend amount is a mechanical calculation, tax characteristics will vary. Over the last decade, the majority of distributions have been classified as long-term capital gains. Dividend income accounted for 20% to 25% in most years.
A few years reported a portion of the dividends as a return of capital. The highest levels of ROC, about 25% of distributions, occurred coming out of the 2008-2009 bear market.
While the quarterly dividend rate varies, it has also grown steadily from $0.06 per share coming out of the 2009 market bottom to the $0.19 per share paid in March.
USA gives us investment exposure to the large-cap U.S. stocks. Shares of USA would be a good investment to build up over time, picking up shares during times of market weakness. I see the fund as a long-term accumulate for wealth type of investment.
The historical 1, 3, 5, and 10-year results all show average annualized returns over 10%. If that trend continues, the USA share price and dividends should grow over time. Just be aware there will be volatility along the way.