{"id":61743,"date":"2023-09-16T08:56:59","date_gmt":"2023-09-16T12:56:59","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/this-7-9-payer-just-changed-its-dividend-policy\/"},"modified":"2023-09-16T08:57:04","modified_gmt":"2023-09-16T12:57:04","slug":"this-7-9-payer-just-changed-its-dividend-policy","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=61743","title":{"rendered":"This 7.9% Payer Just Changed Its Dividend Policy"},"content":{"rendered":"<div>\n<p>Closed-end funds (CEFs) really are the \u201cSwiss army knife\u201d of investments: with one click, they let us grab big income (the average CEF yields 7.9%), diversify (within and beyond asset classes) and buy their holdings for cheap!<\/p>\n<p>But let\u2019s be honest, when it comes to CEFs, <em>it\u2019s all about the dividends.<\/em><\/p>\n<p>On that front, there\u2019s a lot to say. For one, many CEFs pay monthly, making managing our income easy: CEFs\u2019 high yields mean we could potentially replace a $6,500 monthly paycheck with less than $1 million invested and <em>live on dividends alone.<\/em><\/p>\n<p>And check out these discount and dividend stats from across the CEF space:<\/p>\n<ul>\n<li>A third of all CEFs yield over 10%.<\/li>\n<li>48% of CEFs yield over 8%.<\/li>\n<li>On average, CEFs yielding over 8% have a 4.9% discount to net asset value (NAV, or the value of their underlying assets).<\/li>\n<li>85% of CEFs have some form of discount.<\/li>\n<li>43% of CEFs have a discount of 10% or more.<\/li>\n<\/ul>\n<p>But there are some things about CEFs\u2019 distributions that <em>do<\/em> make them a little different. Let\u2019s talk about one of those now: what it means when your CEF has a \u201cmanaged distribution.\u201d For this, we\u2019ll use the <strong>BlackRock Science and Technology Term Trust (BSTZ)<\/strong>, a holding in my <em>CEF Insider<\/em> service, as an example.<\/p>\n<p><fbs-ad position=\"inread\" progressive=\"\" ad-id=\"article-0-inread\" aria-hidden=\"true\" role=\"presentation\"><\/fbs-ad><\/p>\n<h2 class=\"subhead-embed color-accent bg-base font-accent font-size text-align\">CEF Distributions: Under the Hood<\/h2>\n<p>A lot of people look at CEFs like a bank or a yield-dependent asset, such as a bond. They look first at whether the fund\u2019s distribution is covered by net investment income (NII). For a bond fund, this simply refers to the income it gets from a bond\u2019s issuer.<\/p>\n<p>But this doesn\u2019t work for equity CEFs, as equity funds don\u2019t get NII\u2014they earn a total return from capital gains and dividends. That works out great in strong years, as you can see in the total NAV return of BSTZ, the last big tech CEF to go through an IPO, back in 2019.<\/p>\n<p>With its portfolio earning a 136% return in that time, management suddenly had the <em>opposite <\/em>of a dividend-coverage problem, with an average annualized return <em>far<\/em> ahead of the 6% yield on the fund\u2019s NAV at its IPO. So it raised the payout.<\/p>\n<p>Even with the hike, which put BSTZ\u2019s dividend at 19.2 cents monthly, the fund was still paying just around 6% on its NAV, on an annualized basis, because this was its mandate: under its managed-distribution policy, it had to keep payouts around 6%.<\/p>\n<p>The payout hike still wasn\u2019t enough to get the NAV return out the door, though, so BSTZ declared a special dividend in late 2021. For BSTZ\u2019s managers, however, this fast rate of change in the distribution made managing the fund\u2019s cash flow challenging. Then came the 2022 pullback.<\/p>\n<p>Back then, the fund\u2019s managed-distribution policy of targeting a 6% payout meant big dividends in 2021 would fall due to the decline in tech stocks in 2022, even though BSTZ\u2019s performance remained fundamentally solid over the long term.<\/p>\n<p>BlackRock fixed the problem with a small (and barely noticeable) change: they\u2019d target distributions of 19.2 cents a share as best they could, instead of targeting 6% payouts (in March 2023, following the 2022 market decline, they did reduce the payout to 16.1 cents to shore up cash and buy back in as the market recovered, a move I expect to reward us through future NAV gains).<\/p>\n<p>Today, tech is recovering and so is BSTZ, so that policy is unnecessary now. That\u2019s why BlackRock announced on September 8 that it would go back to targeting a 6% payout through a managed distribution that managers can change in the future, depending on market conditions.<\/p>\n<p>Since they\u2019d previously pivoted to targeting distribution <em>amounts <\/em>instead of <em>rates<\/em>, this pivot back to a 6% distribution <em>rate <\/em>suggests they believe payouts won\u2019t be drastically cut\u2014and the 6% payout will in fact grow as the fund\u2019s NAV and market price increase.<\/p>\n<p>In other words, this is a <em>confident<\/em> signal. And it makes sense, now that the tech sector\u2019s crash of 2022 has ended and the recovery, while still slow, is carrying on.<\/p>\n<p>As investors realize BSTZ\u2019s change in distribution reflects management confidence, they\u2019re likely to start buying in. They should be doing so now, with the fund\u2019s 16.4% discount to NAV signaling that retail investors <em>still <\/em>haven\u2019t figured out that 2022 is over.<\/p>\n<p>This change in distribution is BlackRock stating that not only are distributions no longer at risk of being cut, they\u2019re more likely to grow. As a result, I don\u2019t expect the fund\u2019s discount, its biggest since the start of the pandemic, to last long.<\/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 10.2% 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\/09\/16\/this-79-payer-just-changed-its-dividend-policy\/\" target=\"_blank\" rel=\"noopener\">here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Closed-end funds (CEFs) really are the \u201cSwiss army knife\u201d of investments: with one click, they let us grab big income (the average CEF yields 7.9%), diversify (within and beyond asset classes) and buy their holdings for cheap! But let\u2019s be honest, when it comes to CEFs, it\u2019s all about the dividends. On that front, there\u2019s [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":61744,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-61743","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v20.6 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>This 7.9% Payer Just Changed Its Dividend Policy | iFintechWorld<\/title>\n<meta name=\"description\" content=\"Closed-end funds (CEFs) really are the \u201cSwiss army knife\u201d of investments: with one click, they let us grab big income (the average CEF yields 7.9%),\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=61743\" 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