Friday, June 25, 2010

AOD Watch: Still competitive?

Holders of Alpine Total Dynamic Dividend Fund (AOD) have but two questions to ask in light of yesterday's 54% reduction in the dividend: Is the new dividend rate competitive with alternative investments, and is the price of the exchange-traded fund every likely to return to prior levels?
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AOD $5.17

The company, in announcing the dividend decrease, calculated the annual percentage based on the net asset value -- the NAV -- as of June 23: $5.43. This is a bit of window dressing to make the cut seem less awful than it is.

People don't buy a closed-end fund like AOD at the NAV, they buy it at the market price, and AOD has long commanded a hefty mark-up when traded.

So, to the maths:

The new dividend is 66¢ annualized. The old dividend was $1.44.

On June 23, the NAV was $5.43 and the market price was $6.12 at the close, a 12% market premium.

Therefore, the new yield on the NAV is 12.15% (compared to an old yield of 26.52%), and the new yield on the market price was 10.78% (compared to an old yield of 23.53%).

The stock is trading this morning about at the NAV (sometimes below the NAV), so let's take about 12% plus change as the yield.

One competitive place to park money is the high-yield corporate etf, JNK (as in junk bonds). It pays dividends monthly on mainly U.S. bonds and has an annualized yield of 10.06%.

Like AOD, JNK can be pretty volatile. The 20-day average true range (atr) for AOD is 30¢, and for JNK it is 36¢. (The average true range is, on average, how far the price moves in either direction each day.) By contrast, the blue-chip global company GE has an atr of 44¢, and the big electric utility D, with a 4.58% dividend, has an atr of 77¢.

So the capital risk of AOD vs. JNK is identical, but AOD carries a far greater currency exchange risk, since a large proportion of its holdings are abroad and JNK is domestic.

Another high-yield stock is NLY, a company that trades in mortgage instruments: Not the most fortunate of businesses the past couple of years. But, actually, NLY has done well in the crisis -- on the 20-year chart it has traced a very wide sideways range since 2001.

NLY is a REIT -- a real-estate investment trust -- that passes on its profits immediately to shareholders as dividends. It has a yield of 15.78%, which is paid out quarterly. It adjusts its dividend each quarter to account for results. It just went ex-dividend today, with the usual ex-div price decline.

NLY's capital risk is comparable to that of AOD and JNK. The average true range is 33¢. And its holdings are in the U.S., so there is no currency exchange risk.
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JNK $38.23
NLY $17.31

With AOD, I don't want the same rate as JNK and NLY. I want more, to compensate me for my exposure to foreign currencies and stocks .

I conclude, therefore, that AOD is no longer a competitive high-yield investment. JNK for people wanting monthly payouts and NLY for those content with quarterly payouts are both far better places to park money.

What about the money that's already in AOD and that has lost more than 30% of its value this week (at the low so far today of $5.16)?

That's another way of asking these two questions: What is the proper competitive dividend rate, and what in the world will those crazy Europeans do?

The proper rate is probably around 12%, about where it was in comparison to the NAV on June 23. That's the mid-point between JNK and NLY. Risk-free 30-year Treasury bonds are yielding about 4% these days, so a triple multiplier for private-sector risk seems appropriate.

That suggests that the proper price for AOD is $5.50. That's a big hit for most people. The average price over the past quarter before the current decline began is $6.91 (implied yield 9.55%).

The question, then, is whether the Europeans will salvage the eurozone, allowing AOD to again pick good dividends in Europe without huge currency exchange risk. The EUR/USD price is down about 18% from January, when the current slide began. The euro has made that magnitude of move time after time. so, it's not an insurmountable obstacle. No big deal.

The stock price requires a 25% rise to move from the competitive price, $5.50, to the quarterly average, $6.91.

Historically, for AOD, that's not an unusual magnitude of move. May's range was 42.4%. In March, it was 10%. There's no reason in terms of historic volatitlity that AOD can't recover the capital loss in month or two.

In the end, it all comes down to the Europeans.

In the last annual report (September 2009), a third of AOD's holdings were in Europe. But mainly, not in the eurozone. In fact, 15% of the European holdings were in the non-euro countries of Sweden, Switzerland and the U.K.

The main requirement for the health of AOD's holdings isn't a specific solution to the euro crisis, but rather any solution that will provide currency stability.

Since stability is interests of all Europeans, that sort of solution will happen. I would argue that we're at the darkest point of the euro crisis, and things will improve from here.

AOD's biggest fault was not adjusting the dividend incrementally as the crisis unfolded. Instead, the fund managers allowed things to deteriorate without dividend consequences until they were forced to do a huge reduction in one fell swoop.

Not too terribly fair to smallholders of AOD's shares. But then, "fair" isn't a normal outcome in the markets.

Two strategies, then:

If I think that AOD is been punished too much, then I'll continue to hold and collect dividends while waiting for a solution to the euro crisis and a capital recovery of AOD.

If I think AOD will be trading at these levels for a very long time, then I'll take the capital loss and move my money to JNK or NLY (where, actually, I already have part of my money).


The Great Reflation: How Investors Can Profit From the New World of Money
OK. The credit bubble burst. Housing, burst. Shockwaves reverberated. Markets collapsed. What lies ahead as we remerge from the wreckage.



Disclaimer
Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.


No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

Abbreviations:

  • psar - Parabolic Stop and Reverse
  • adx - Average Directional Index
  • pps - Person's Proprietary Signal
  • ma20 - 20-day moving average
  • macd - Moving Average Convergence-Divergence
  • sto - Fast Stochastic


About the glance: The colors indicate the state of each signal.

  • trend: Determined by the 5-day moving average, green for up, red for down, yellow for sideways
  • adx: orange for above 30-up, blue for 20-down, purple for in the middle. Red is most prone to whipsaws
  • psar, pps, macd: green for bull mode, red for bear
  • sto: green for overbought, red for oversold, yellow for the neutral zone.

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