From time to time, Contrarian Outlook hosts “high-paying shootouts.” Two high payers are pitted against each other to see who wins.
This is a great way for us as investors to accomplish two things. 1) Get the safest high dividends with the most upside potential, and 2) Hone your portfolio construction skills.
I recommend closed-end funds (CEFs), which are known for their large (and often monthly) dividends. These actively managed funds pose a slightly unique challenge to analyze because each holds a large number of assets (often hundreds).
Fortunately, there are several metrics you can use to pick out the best. Let's demonstrate with today's candidates. Both are high-tech CEFs. Yield is 5.8%. Columbia Seligman Premium Technology Growth Fund (STK) And that BlackRock Innovation and Growth Period Trust (BIGZ)the payout rate is 7.2%.
Portfolio analysis: two funds with different views on technology
Let's kick things off with the top holdings of this pair, starting with STK.
Source: Columbia Seligman
As you can see, these stocks are skewed towards size and value, with the following dominant players: Microsoft (MSFT), Broadcom (AVGO), NVIDIA (NVDA) and Apple (AAPL) Ranked in the top 10 stocks held. These 10 stocks make up almost half of his STK portfolio, and the rest of his holdings are very similar.
The table also provides a snapshot of how the fund works. The management sells his STK shares and invests the cash in these large-cap stocks. It then locks in profits and uses that cash to pay dividends.
The tech sector has posted a 9% annualized total return over the past 25 years (starting at the peak of the dot-com bubble in 1999), so STK can easily maintain its dividend.
Now let's move on to BIGZ, which has an even more generous yield of 7.2%. Its portfolio is also more aggressive.
Source: BlackRock
Indeed, BIGZ's top 10 holdings are: far There are names from everyone's household names, and the same is true for almost everything in the portfolio. This is because STK invests in large-cap stocks, while BIGZ focuses on small- and mid-cap stocks. You can also see “Project Rocket” in his 10th place above. This is a private equity investment that has not yet gone through an IPO.
So far, we've seen that while these two funds both invest in technology, they have very different philosophies. So how did their strategy play out on the ground?
Past performance: STK wins, but it's still early days
You might think that BIGZ's (purple below) focus on growth companies would move the fund forward over STK's more established alternatives. But that would be the wrong view.
STK will crush BIGZ in the short term…
As you can see above, BIGZ (purple) is down just over 50% since its inception in mid-2021, even including dividends. But a lot of that is down to timing: The fund went public when the tech industry was in a mini-bubble that has since burst. As a result, many of the investments BIGZ made at the time have been written down and the fund is struggling to recover.
On the other hand, STK (orange above) has given investors a respectable return of 40%. That's not all.
…and shine in the long run
STK has weathered a lot of turmoil since its founding 15 years ago, but it still delivers an impressive annual return of 14.5% (with dividends reinvested). So it's no wonder the fund has had no trouble maintaining its dividend. Special dividends are also paid.
Discount: STK is expensive, BIGZ is oversold
After reading this far, you might think STK is the winner. Well, not so fast. We haven't yet talked about discounts to net asset value (NAV, or the value of a fund's assets).
These discounts, a key value indicator for CEFs, exist because CEFs generally have a fixed number of shares throughout their life, which allows them to trade at a different level than the portfolio's value (and which can be traded regularly). ) for. The discount story is different for these two funds.
BIGZ discount boosts profits
As you can see above, STK (orange) is trading at a fraction of the price. premium This means that investors are willing to pay more than the value of the asset. This is very different from the case of his BIGZ (purple), which has a 16.4% discount. This deal exists because the fund has struggled in its short time since its inception. On the other hand, STK comes with a premium because it has a long history of instilling confidence in investors.
Of course, even though buying STK now has a good chance of generating profits and guaranteed income in the future, I wouldn't buy an asset for more than it's worth. The small premium also means you can expect STK's returns to track your portfolio's performance, which isn't bad. But there's more to expect from BIGZ, and its returns are likely to be linked to portfolio performance. and You will get an additional boost once the discount ends.
But will that discount end? There is reason to think it will happen, even if it takes time.
Notice the word “Term” in BIGZ's name. This means that the fund is scheduled to be liquidated at its NAV 12 years after its creation. This means that discounts quickly turn into additional profits.
Indeed, we will have to wait until March 26, 2033, when BIGZ is scheduled to end. However, in anticipation of the end of the fund, other investors may buy more BIGZ at a further discount before that happens.
If that sounds like free profit, it is. However, there is a catch. Management can extend the dissolution for one and a half years. Additionally, even if the Fund does not sell all of its BIGZ shares at the time of its scheduled closure, the Fund may continue to operate as long as other conditions are met.
Dividend sustainability: We'll call it a tie.
BIGZ's discount has another benefit: it makes the dividend safer.
Let's analyze this idea a little. As of this writing, BIGZ's yield is 7.2% based on market price. However, since there is a discount, the yield calculation is NAV value per share. This can also be translated into saying that management can maintain a 7.2% dividend by only earning his 6% in the market.
STK's yield is around 5.8% at the time of writing, and as I said, it trades at a small premium, so even if you calculate it based on NAV per share or market price. , the dividend remains at approximately 5.8%. .
Think of BIGZ as a short-term play and STK as a long-term play.
After all, BIGZ has far greater risks and Those who plan to hold it for less than 10 years will be rewarded higher than STK. STK, on the other hand, is the kind of fund you can buy today and keep for the rest of your life (though it will again be sold at a discount, as it was in 2020 and much of the 2010s). In the meantime, we recommend you to wait until (and in the meantime, buy another high-quality high-tech CEF at a discount).
If you just look at the yields of these two funds and don't go any further, you won't understand any of what we just discussed. This means there is almost certainly a CEF that fits your portfolio. All it takes is a little digging to ensure you find the right one.
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See also:
• Warren Buffett's Dividend Stocks
• Dividend Growth Stocks: 25 Nobles
• Future Dividend Aristocrats: Strong Candidates
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
