{"id":54355,"date":"2023-08-29T09:03:59","date_gmt":"2023-08-29T13:03:59","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/investors-make-these-2-dividend-blunders-way-too-often\/"},"modified":"2023-08-29T09:04:02","modified_gmt":"2023-08-29T13:04:02","slug":"investors-make-these-2-dividend-blunders-way-too-often","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=54355","title":{"rendered":"Investors Make These 2 \u2018Dividend Blunders\u2019 WAY Too Often"},"content":{"rendered":"<div>\n<p>Over a decade ago, closed-end funds (CEFs) helped me achieve financial independence. Since then I\u2019ve seen <em>hundreds<\/em> of other people use them to get there, too. I\u2019m certain these unloved funds\u2014payers of 8%+ dividends\u2014can help you do the same.<\/p>\n<p>Well, I shouldn\u2019t say \u201cunloved.\u201d \u201cMisunderstood\u201d is more accurate.<\/p>\n<p>As I write this, the CEFs tracked by my <em>CEF Insider <\/em>service yield 8.3% on average. But because the CEF market is small and off the radar to most folks, many don\u2019t know what to look for in these high-yielding funds\u2014if they know about them at all.<\/p>\n<p>Today we\u2019re going to change that by looking at a couple common mistakes people make when choosing CEFs, and how these errors can lead them to miss out on 8%+ yielders that offer sustainable payouts and strong gain potential, too.<\/p>\n<p><strong>CEF Mistake No. 1: Judging CEFs by Price Alone<\/strong><\/p>\n<p>The biggest mistake I\u2019ve seen people make is actually kind of silly when you stop and think about it. They\u2019re looking at the wrong performance charts.<\/p>\n<p><fbs-ad position=\"inread\" progressive=\"\" ad-id=\"article-0-inread\" aria-hidden=\"true\" role=\"presentation\"><\/fbs-ad><\/p>\n<p>According to this, the performance of the <strong>Virtus Equity &amp; Convertible Income Fund (NIE)<\/strong> is pretty uninspiring. A 12% gain in a decade is savings-account-level stuff, yet this is supposed to be a fund of stocks and convertible bonds that boost income way higher.<\/p>\n<p>Thing is, this chart only focuses on price gains. It\u2019s the kind of chart you see on Google Finance or Yahoo Finance; it\u2019s the kind of chart brokers use and that big financial publications rely on.<\/p>\n<p>It\u2019s also <em>only part of the story,<\/em> at best.<\/p>\n<p>Here we see the price change for NIE over the last decade alongside <em>the total return price.<\/em> That\u2019s the total cumulative profit NIE shareholders received over this period <em>including dividends<\/em>, which price charts ignore. That\u2019s right, all the charts most people rely on forget about income! If we look at just the price chart for any dividend-paying investment, it\u2019s only going to give us part of the picture.<\/p>\n<p>This can make a big difference with CEFs like NIE, which yields 9.6%. It\u2019s even a game-changer with the S&amp;P 500, which only yields around 1.4% now.<\/p>\n<p>The data point everyone focuses on is the 165.9% price return over a decade, but the S&amp;P 500 has actually delivered a 219.4% total return (including dividends).<\/p>\n<p>The gap with CEFs is so wide because of their big payouts. Going back to NIE, this hybrid debt\/stock fund yielding 9.6% has delivered a 10.3% annualized return, with most of that as dividends. But search it on Yahoo Finance (or any other popular stock searching platform) and you see this:<\/p>\n<p>That\u2019s very different from NIE\u2019s actual 8.9% annualized return over that five-year period, when we add in dividends:<\/p>\n<p>When we add payouts, we get a much better performance. But this doesn\u2019t please everyone, as NIE did underperform the S&amp;P 500 over that period. Which leads me to:<\/p>\n<p><strong>CEF Mistake No. 2: Comparing CEFs to the Wrong Benchmark<\/strong><\/p>\n<p>This is a common criticism of CEFs: they don\u2019t beat the index! Too bad it\u2019s often wrong.<\/p>\n<p>NIE\u2019s portfolio is roughly 56% convertible bonds and 40% high-yield bonds, so it\u2019s not a stock fund. While its convertible bonds have equity-like characteristics, and NIE does hold stocks in some companies (largely as a result of its convertible bonds changing over to stocks), comparing it to the S&amp;P 500 makes no sense.<\/p>\n<p>This is no secret; it\u2019s just that most people don\u2019t read the fine print. NIE\u2019s composite benchmark \u201cconsists of 40% ICE BofA U.S. Convertibles Index [representing convertible securities], 45% ICE BofA U.S. High Yield BB-B Constrained Index [representing high-yield bonds] and 15% Credit Suisse Leveraged Loan Index.\u201d This is something NIE discloses in its SEC filings regularly (I\u2019m taking this from NIE\u2019s Form N-CSR, filed with the SEC on October 11, 2022, on page 5, but they disclose this yearly).<\/p>\n<p>A fairer comparison would be to stack NIE up against ETFs that track indexes like these, like the <strong>iShares Convertible Bond ETF (ICVT), SPDR Bloomberg High Yield Bond ETF (JNK)<\/strong> and <strong>Invesco Senior Loan ETF (BKLN). <\/strong>Weight the returns of these long term, and if NIE has done better, it\u2019s a winner.<\/p>\n<p>NIE is an outperformer, providing exposure to the income of convertible and corporate bonds and diversification outside of stocks. Plus its discount to net asset value (NAV, or the value of the holdings in its portfolio) is 10.1%, so we\u2019re buying NIE\u2019s portfolio for just 90 cents on the dollar, which is great for us\u2014but makes no sense for a fund that\u2019s performed as well as this one has.<\/p>\n<p>When investors realize this, NIE\u2019s discount will disappear. But we want to buy before then so we can get its big income stream (bigger than the yields on all the ETFs above, by the way). NIE\u2019s appeal doesn\u2019t end there: that 9.8% dividend yield has been <em>growing<\/em>. It has a history of paying big special dividends, too.<\/p>\n<p>Now that we\u2019ve talked about errors to avoid when buying a CEF, in next Monday\u2019s Contrarian Outlook article I\u2019m going to dig into three things you should look for when buying a CEF.<\/p>\n<p><em>Michael Foster is the Lead Research Analyst for <\/em><em data-ga-track=\"ExternalLink:https:\/\/contrarianoutlook.com\/forbessigmf?source=DIVGRWFSIGMF=&amp;utm_source=forbes&amp;utm_medium=cpc&amp;utm_campaign=signature\">Contrarian Outlook<\/em><em>. For more great income ideas, click here for our latest report \u201c<\/em><em data-ga-track=\"ExternalLink:https:\/\/contrarianoutlook.com\/free-cef-report-offers\/forbessig?source=CEFRPTSIGCOREG=&amp;utm_source=forbes&amp;utm_medium=cpc&amp;utm_campaign=signature_coreg\">Indestructible Income: 5 Bargain Funds with Steady 10.4% Dividends.<\/em><em>\u201d<\/em><\/p>\n<p><em>Disclosure: none<\/em><\/p>\n<\/div>\n<p>Read the full article <a href=\"https:\/\/www.forbes.com\/sites\/michaelfoster\/2023\/08\/29\/investors-make-these-2-dividend-blunders-way-too-often\/\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Over a decade ago, closed-end funds (CEFs) helped me achieve financial independence. Since then I\u2019ve seen hundreds of other people use them to get there, too. I\u2019m certain these unloved funds\u2014payers of 8%+ dividends\u2014can help you do the same. Well, I shouldn\u2019t say \u201cunloved.\u201d \u201cMisunderstood\u201d is more accurate. As I write this, the CEFs tracked [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":54356,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-54355","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Investors Make These 2 \u2018Dividend Blunders\u2019 WAY Too Often | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Over a decade ago, closed-end funds (CEFs) helped me achieve financial independence. 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