GDV: an attractive discount and a distribution yield of around 6%

0

PM pictures

Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on July 28, 2022.

In our previous Gabelli Dividend & Income Trust update (NYSE: GDV), the fund was in a similar situation with a bigger discount than usual. The discount continues to remain attractive at a wider discount with the combination of the overall market declines.

In fact, the discount since this update has also slipped a bit deeper. This can present a compelling opportunity to potentially add or initiate a position.

However, we have made up a lot of those losses more recently. This has been experienced in both GDV and S&P 500. Over the past month, they have performed quite similarly. So while we’re looking at a near 12% discount, some of the overall declines have reversed more recently.

GDV and SP500 returns over 1 month

GDV and SP500 returns over 1 month (Looking for Alpha)

The basics

  • Z-score over 1 year: -0.59
  • Discount: -11.82%
  • Distribution yield: 6.10%
  • Expense ratio: 1.30%
  • Leverage: 14.34%
  • Assets under management: $2.452 billion
  • Structure: Perpetual

GDV is describe as “a diversified closed-end investment company whose objective is to provide a high level of total return”. Their investment policy is as follows: “Under normal market conditions, the Fund invests at least 80% of its assets in dividend-paying or other income-generating securities. normal market conditions, at least 50% of the assets of the Fund will consist of equity securities with the right to dividends.

Overall, they are fairly free to invest as they see fit, with a tendency to hold a fairly large weighting in dividend-paying stocks. This would usually help fund distribution. However, preferred dividends make up a large portion of the fund’s net investment income.

Here is the latest outstanding favorite they have. They had redeemed their Preferred Cumulative Series G earlier this year. Although dividends are higher on these preferred shares, they also benefit from the fact that they are primarily fixed rate – an important distinction in a rising rate environment. This is except for B-series, C-series and E-series preferred. These are a small minority of top favorites. Overall, they are only moderately indebted.

GDV capital structure

GDV capital structure (Gabelle)

Below is an overview of dividend rates through 2021 from their previous annual report. (Series G is shown here but has since been redeemed, as mentioned above.) Series H is currently the highest yielding but cannot be redeemed until June 10, 2024.

GDV annual report

GDV annual report (Gabelle)

Performance – Wider drifting

In our previous article, the discount was around 10.5%. It has now expanded a little further. We even recently saw a discount of more than 13% on the fund for a short period. This discount has moved in the other direction, alongside the market’s stronger rebound over the past month.

Over the past five years, the fund has posted an average discount of 9.64%. Below we can see that much larger discounts were relatively short-lived. Of course, smaller discounts are also short-lived.

History of GDV premiums/discounts

History of GDV premiums/discounts (CEF Connect)

For me, this means that the price is quite attractive. Combining that with the ever lower markets overall, I think that’s why GDV is more compelling right now.

Here is the total return chart since the beginning of the year. I’ve also included the S&P 500 index to provide some context. GDV is not invested in the same way as the S&P 500 in that it is not as heavily invested in technology.

Returns GDV and SP500

Returns GDV and SP500 (Looking for Alpha)

At the end of June 2022, CEFConnect had a total net asset value return of -19.42% versus -22.10% based on the total share price. This shows how well we recovered during the month of July.

Distribution – Attractive yield of 6.10%

GDV provided a relatively attractive and stable distribution to shareholders. They pay monthly and have been paying out $0.10 per month since around 2015. They only show two distribution cuts, both of which occurred during the Great Financial Crisis. This is a time when I would criticize and look past such a flaw.

GDV distribution history

GDV distribution history (CEF Connect)

The fund had paid a small year-end distribution last year to comply with its structure as a regulated investment company broadcast requirements. This forces the fund to pay substantially all of its realized earnings (income and gains) or pay an excise tax.

To finance its distribution, the fund will need capital gains. This may be harder to come by in a bear market than we experienced in 2022. Still, there are ways to generate capital gains. This can be done by integrating unrealized gains into the underlying fund and turning them into realized gains. At the start of this year, the fund had an unrealized capital gain of $1.35 million.

We must also consider that even though most investments are down, there may still be up positions. Even in 2022, not all investments are down – just most! Swedish Match (OTCPK:SWMAF) is one such position that we will discuss below.

GDV annual report

GDV annual report (Gabelle)

As I mentioned above, preferred dividends are quite an expensive way to leverage the fund. This caused GDV to demand even more capital gains to fund both ordinary and preferred distributions. Some of these preferred share distributions will be lower now that Series G has been redeemed. That being said, there will certainly remain a significant portion removed from the reduction in common shareholder income.

After factoring in preferred stock, we’re looking at just over $5 million NII for common shareholders. That’s against the nearly $125 million the fund pays out each year.

We primarily see long-term capital gains in the characterization of the distribution for tax purposes. This is to be expected. The smaller portion identified as ordinary income will generally also be considered a qualified dividend.

GDV tax character

GDV tax character (Gabelle)

From my own 1099, GDV ordinary dividends were classified as 100% qualified dividends for the past year.

GDV portfolio

One of the most attractive positions in the fund’s portfolio is SWMAF. While I never really understood why it was such an important position. What would a Swedish tobacco company focusing primarily on on smokeless tobacco to do in a dividend portfolio? Gabelli even includes the position in its utility funds. (The largest position in the Gabelli Global Utility & Income Fund (GLU) is also SWMAF.)

Distribution of Swedish match sales

Distribution of Swedish match sales (Swedish game)

Well, apparently Mr. Gabelli knew what he was doing. The title received an offer from Philip Morris (PM) to be acquired. This saw the stock jump and maintain a high.

SWMAF Returns

SWMAF Returns (Looking for Alpha)

However, this acquisition is not yet set in stone. Activist management group Elliot is seeking to oppose the sale. They increased their stake in the business to have more control to combat this. It seems that they are not the only group to complain about this agreement. It could ultimately lead to an even better offer for shareholders with a higher price or work the other way and push away any buyer.

Whatever the end result, it just helps to provide an example of a position that can still produce gains. These are the types of gains that can be cut to go towards distribution to GDV shareholders.

GDV Top 10

GDV Top 10 (Gabelle)

It’s also not the only top position that has shown gains for the year. Genuine parts (GPC) shares are also higher this year. Another weird position that I certainly wouldn’t have encountered on my radar.

GPC Returns

GPC Returns (Looking for Alpha)

GPC recently released its earnings, which showed both up and down pace. They had also strengthened their tips on top of that. Shares were already higher for the year, but that propelled the stock even further. This company provides automotive parts and various other vehicle parts, including recreational vehicles, agricultural and marine equipment.

Overall, GDV’s portfolio is skewed towards more value-oriented sectors rather than growth-oriented. The financials, healthcare, and food & beverage sectors represent the highest weighting in this fund. I think that makes it relatively more attractive and a way to diversify away from more tech-focused funds.

Conclusion

GDV remains an attractive offer for investors. The discount has even widened slightly since our last update. At that time, it was already a slightly larger long-term discount. The market has rebounded over the past month quite aggressively. That being said, it is even lower, which adds to the attractiveness of the fund’s discount. I believe the fund is a buy right now for a long-term investor looking to diversify their portfolio away from the more typical positioning in other diversified funds.

Editor’s Note: This article discusses one or more securities that do not trade on a major US exchange. Please be aware of the risks associated with these actions.


Source link

Share.

Comments are closed.