{"id":58074,"date":"2023-09-07T11:09:39","date_gmt":"2023-09-07T15:09:39","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/this-18-9-dividend-was-completely-pointless\/"},"modified":"2023-09-07T11:09:43","modified_gmt":"2023-09-07T15:09:43","slug":"this-18-9-dividend-was-completely-pointless","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=58074","title":{"rendered":"This 18.9% Dividend Was Completely Pointless"},"content":{"rendered":"
\n

Years ago, we had a 15-month fling with a promising fund. It traded at a generous discount to its net asset value (NAV) and paid a double-digit dividend.<\/p>\n

Plus, its price was rallying!<\/p>\n

Brookfield Real Assets Income Fund (RA)<\/strong> checked all the boxes. Unfortunately, it failed the all-important \u201ccash-flow smell test.\u201d<\/p>\n

RA\u2019s NAV was declining<\/em>. Not a good sign given the nebulous nature of its holdings.<\/p>\n

The \u201crealness\u201d of RA ends with its name. More than half<\/em> the portfolio is securitized real estate credit.<\/p>\n

And actual infrastructure<\/em>? The \u201creal assets\u201d headline buyers think they are investing in? Just 30%!<\/p>\n

Even in 2018, shortly after the fund launched, it was apparent to us second-level thinkers that RA\u2019s dividend was a mirage. The payout would eventually be cut. We were out.<\/p>\n

In the November 2018 issue of Contrarian Income Report<\/em>, we called RA out as a pretender and sold our shares:<\/p>\n

<\/fbs-ad><\/p>\n

\u201cThe fund\u2019s generous distribution (10%+) and equally generous discount (6% to 9%) gave us a margin of safety while we awarded their promising management team time to dial in their strategy. But to be blunt, they haven\u2019t.<\/em><\/p>\n

Their average coupon today pays just 4.8% while they\u2019re on the hook for a 10.4% distribution on NAV. Borrowing cheap money helps fill some of the gap but not enough of it. And the portfolio remains too heavily focused on fixed-rate and longer-duration bonds for my liking.<\/em><\/p>\n

Let\u2019s take our modest 1% total returns and move on.\u201d<\/em><\/p>\n

After we dumped RA, the fund continued to pay its usual monthly dividend for nearly five<\/em> more years. The payout defied gravity, but really, management was putting the \u201cRA\u201d in fraud! They continually tapped the piggybank of NAV to keep the monthly dole rolling.<\/p>\n

How do I know? RA\u2019s NAV is 37% lower today<\/em> than the day we kicked it to the curb. Yikes!<\/p>\n

Ultimately the levitating dividend came crashing down to reality. Last week, RA announced a 41% payout cut<\/em>. The fund\u2019s price cratered, and today the fund\u2019s total return<\/em> since we sold it is only 10.7%.<\/p>\n

Which means the fund continued to limp along, delivering an average 2% per year. We were smart to move on, as we had better places for our money.<\/p>\n

OKEOK (OKE)<\/strong>, for example. The energy toll bridge was a better bet on oil infrastructure than hazy RA. OKE owned actual<\/em> real assets and transportation lines.<\/p>\n

And the value! OKE was a contrarian delight when we issued a CIR<\/em> Flash Alert to buy it in April 2020. The world was shut down, oil futures were trading for less than zero and OKE yielded 13.2%.<\/p>\n

The dividend looked dicey, but we reasoned that the company had enough assets to generate cash for the payout. And if not, then hey, even a 20% cut would have left us with a double-digit dividend. Happily, we were rewarded with price gains and<\/em> an eventual payout hike<\/em> as OKE survived and soon thrived.<\/p>\n

Now we\u2019re looking for the next \u201cobvious in hindsight\u201d dividend play. My bet is on bonds.<\/p>\n

The 10-year Treasury yield is bumping its head\u2014once again\u2014on the 4.3% ceiling. This<\/em> is the time to buy bonds: when rates are high, and investors hate them!<\/p>\n

Last week\u2019s labor data reveal a market that is finally<\/em> slowing. No surprise. The Fed was going to keep<\/em> hiking rates until<\/em> wage growth subsided.<\/p>\n

Which would only happen in a recession. Think about it\u2014we have a structural shortage of workers. Every business is desperate to hire. Only a \u201cslowdown\u201d would calm down wage growth, and the question is whether we\u2019re looking at a soft landing or a brutal one.<\/p>\n

Either way, long rates decline when the economy slows down. Which is bullish for bonds.<\/p>\n

But be careful! Not all income funds are created equal. Just ask RA shareholders, who have been collecting dividends and losing most of them in price declines for years now.<\/p>\n

NAV matters. Gains are driven by a fund\u2019s holdings. Which is why we always check under the hood\u2014and keep checking<\/em>.<\/p>\n

It\u2019s OK to make mistakes. It happens in high-yield land, where the payouts are often generous for a reason. However, it\u2019s not<\/em> OK to stick with a loser. Especially one that fails the cash flow smell test. Best to cut bait and buy something better.<\/p>\n

Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever.<\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Years ago, we had a 15-month fling with a promising fund. It traded at a generous discount to its net asset value (NAV) and paid a double-digit dividend. Plus, its price was rallying! Brookfield Real Assets Income Fund (RA) checked all the boxes. Unfortunately, it failed the all-important \u201ccash-flow smell test.\u201d RA\u2019s NAV was declining. […]<\/p>\n","protected":false},"author":1,"featured_media":58075,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-58074","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nThis 18.9% Dividend Was Completely Pointless | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Years ago, we had a 15-month fling with a promising fund. 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