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From time to time, “high-payoff shootouts” are held. 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 each hold a large number of assets, often in the hundreds, making them a somewhat unique challenge to analyze.
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.
STK Holdings
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 gives a snapshot of how the fund works: management sells shares in STK and invests the cash in these large cap stocks, then locks in profits and uses the 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.
BIGZ Holdings
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 exceeds
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.
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, an important value indicator for CEFs, exist because CEFs typically have a fixed number of shares over their lifetime and can (and do so periodically) trade at a different level than the portfolio’s value. is. The discount story is different for these two funds.
CEF Discount
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 creation. 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 will give you profits and a steady income in the future, you don’t want to pay more than the asset is worth. The slight premium means that you can expect STK’s profits to track your portfolio’s performance, which isn’t bad. But BIGZ’s profits are more likely to track your portfolio’s performance, so you can expect even more. 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 profits, it is. But there’s a catch: management can extend the dissolution for a year and a half. And even if it doesn’t sell all of its BIGZ shares at the planned closure, the fund can keep operating 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 break this idea down a bit. As of this writing, BIGZ’s yield based on market price is 7.2%. However, since there is a discount, the yield calculation is NAV value per shareAnother way of saying this is that management only needs to earn a 6% market return to maintain a 7.2% dividend.
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.
Michael Foster is the next Principal Research Analyst. contrarian outlookFor more income-boosting ideas, check out our latest report, “Undying Income: 5 Great Value Funds with Stable 10.9% Dividends.”
Disclosure: None
