Dividend Triples, Yield Hits 10%

01/24/2011 11:24 am EST

Focus: FUNDS

Richard Lehmann

Publisher, Forbes/Lehmann Income Securities Investor

A closed-end fund with a blue-chip bent looked good to Richard Lehmann of the Forbes /ISA Closed End Fund & ETF Report, even before the recent payout hike.

We are expecting the new year to be a good one for stocks, especially those stocks paying dividends.

We noted the decline of bond prices over the last few months and surmise the cash must be going somewhere. It became evident that a common stock dividend of 3.5% was a whole lot better than interest on a bond of the same amount.

The possibility of a dividend increase, the better tax treatment and the allure of price increases make the stock a better buy in a low interest rate environment. Inflation protection is another added benefit.

We looked at a number of closed-end funds that invested in dividend-heavy stocks and which traded at a large discount to their net asset value.

A Triple Threat Shocker
The NFJ Dividend, Interest & Premium Strategy Fund (NYSE: NFJ) invests in large-cap value stocks that pay high dividends. The fund writes call options on its holdings to enhance return. It also invests in convertible securities. One might think that such a triple threat would have a high payout, but this fund yielded 3.7% last year.

We anticipate a shrinking of the discount and capital appreciation of the underlying securities to boost the price of the fund. There is also the possibility of a change in the dividend policy.

[NFJ has indeed changed its dividend policy, tripling the quarterly payout late last month in a reversal of the cuts it undertook during the downturn. Despite the resulting share price spike, the forward yield rose to 10.2% based on Friday’s closing price of $17.63—Editor.]

The price/earnings ratio of the fund is a low 12.39. It currently trades at a discount of 7.57% to net asset value. As of Dec. 31, the fund had 71.7% allocated to equities and 24.1% to convertibles. NFJ writes calls on approximately 66%. It is concentrated in energy (23.2%), financials (21.6%) and health care (13.8%).

[Starved for yield? Carla Pasternak recently picked the safest dividend in the S&P 500. Josh Peters prescribes a drug stock boasting a very long history of payout hikes. High yields are plentiful north of the border, writes Rob Carrick—Editor.]

Subscribe to the Forbes/ISA Closed-End Fund & ETF Report here…

Related Articles on FUNDS

Keyword Image
Is a Bottom Forming for MLPs?
11/27/2017 5:00 am EST

I think we’re finally seeing the bottom forming in MLPs, which is good news for JPMorgan Aleri...

Keyword Image
Takeover at Oppenheimer?
11/15/2017 3:58 am EST

On November 1, we featured Doug Hughes' recommendation for investment banking firm Oppenheimer Holdi...