RE:Wouldn't it make sense?ChazBrown wrote: This split has religiously paid the dividend each month, through ALL of the downturns, great or small for more than 15 years without missing one. The dividend is pretty much locked in at 13%-14%. So why doesn't every 'dividend' related investment blog/vlog in North America point to this as a rock solid way to make a pretty damn fine return? I mean, if they paid through the 2008-9 'Great Recession', doesn't that say enough about the risk/reward to make it a solid play? Just curious why no one ever mentiones these splits as an option, at least one like this, with such a sterling track record...
I can think of several reasons why this would not appeal to certain types of investors:
- Dividend Growth Investors won't touch it as the distribution started at $0.10 and it is still $0.10 today.
- Conservative Blue Chip investors don't trust high yield, especially in the double digits
- Some investors avoid leverage of all kinds whether direct or indirect. DFN is indirect leverage in the sense that the DFN holder does not have to make any financing payments to the lender, but does give up certainty of a dividend in exchange for capital gains on over half the fund
- Some would rather hold the underlying stocks directly than through a fund and expect their total return higher, even if monthly income is lower
- Those who follow the principle of 'If you don't understand how the company makes money, don't invest in it' and don't understand how split shares work will avoid
- There is a chance for capital appreciation during market dips, but over the long term, the price tends to be range bound
- It started out at an 8% yield on a $15 initial price and is now a 14% yield on an $8.71 price. Some investors see high yield and lower share price a red flag.
Class A split shares appeal to a certain type of investor. Any leveraged product can offer big gains, but can also experience greater losses. DFN has been very stable but the fact that the NAV is below the IPO value of $25 shows that even in an extended bull market, the fund is holding, not gaining.
Of three types of investors, DGI (Dividend Growth Investor), PGI (Price Growth Investor) and IGI (Income Growth Investor), it really only appeals to the IGI, which is a much smaller market.
It can of course be made into a DGI investment, one just has to reinvest. Whereas the DGI investor may also reinvest, they are only doing so with a 4 or 5% dividend and the capital gains accumulated do not contribute to this growth. With DFN there may be no capital gain, but the full 12% or 13% can be reinvested, thereby growing income much faster.
There can be an opportunity for the PGI, but one would have to either watch the market or have alerts set, or buy on Offerings and sell when it recovers. Lately there hasn't been the same type of recovery as when it bounced back above $9. FTN and FFN offer much better swing trading/shorting than DFN.
One may do better on a total return basis holding the stocks directly, but with that comes management decisions in terms of what to buy/sell and when. One could employ leverage themselves but with that comes risk of rising rates and/or loans/margin being called in a market downturn.
DFN offers a consistent monthly income as long as markets are reasonably steady, but I think the investor population is composed much more of PGI or capital gains investors and to a much lesser extent DGI, so despite its track record will continue to be of appeal to a smaller group of investors.