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Cohen & Steers Quality Income R Message Board

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  • dclewis12002 dclewis12002 May 21, 2011 12:16 AM Flag

    interst hikes

    If rates rise, I think the price of RQI will take a hit for 3 reasons;
    - If rates are raised the entire market will swoon. RQI is in the market, it will swoon to regardless of anything else - everything will be hit.
    - The value of RQI is in it’s portfolio. The price of the holdings will be hit by the general market swoon, thus the NAV of RQI will take a hit.
    - Cohen & Steers borrows money for the leveraged portion of RQI. Increasing rates will affect the net cost of that leverage, which means even more ROC to support the RQI distribution, which makes the fund less desirable, which will affect price.

    The 3 effects may be coupled, but I expect RQI to react more negatively to a rate rise than a non-financial stock, or an unleveraged closed end fund, or a mutual fund. I'm often wrong.

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    • You both make sense, I am not so worried about the stock price as much as the dividend. I bought this stock for income when I retire soon. The cost of borrowing money will certainly hurt the dividend, but im not sure the dividend wont be increasing soon. If it does higher rates may not change things much. Any thoughts?

      • 1 Reply to tweetymerc
      • Several years ago I bought some Cohen and Steers REIT funds for retirement, just as you plan to do. Things worked fine for several years, but then it turned into a major disaster. I advise great caution. Managed distribution policies coupled with high monthly or quartely payments seem ideal, the trouble is they are not sufficiently flexible in a dynamic market environment, so the funds (and you) can get wiped out. The important thing to understand about the RQI divy is that it’s not your normal divy. Most CEFs pay their divy out of NII (Net Investment Income) which is divys and interest paid to a fund from the holdings in their portfolio, sometimes a fund in trouble will pay the divy out of earned capital gains, or the capital they hold to fund the portfolio, this is called return of capital (ROC). With RQI it’s almost ALL ROC, right now. If they increase the divy, or if interest eats more of RQI return, even more of the divy will be ROC. RQI has a managed distribution policy, so the divy will be held constant; when things get bad they just increase the ROC, which negatively impacts RQI’s NAV - this amounts to giving your $ back to you in small quarterly payments. This is what they actually did from 2007 to 2009 and it virtually dissipated nearly all the value in all Cohen & Steers CEF REIT funds - RQF, RLF, RWF lots of funds that are no longer around went into 2007 with NAVs and prices in excess of $20, by the end of 2009 they were worth much less than $2 and their monthly distribution was constant all the way, check the charts . My point is: don’t feel complacent that the divy isn’t going to be cut; I really don’t expect the divy to be cut because of their managed distribution policy. And don’t feel good if the divy is increased, because virtually ALL of it is coming out of your NAV anyway. Keep a very close eye on what’s going on with RQI’s NAV because between the managed distribution policy & their paying out MUCH more than they’re earning via NII, they can, and have, dissipated the value of RQI and other funds. Look, an increased divy that’s taken out of your NAV just decreases your price by the amount of the divy increase - you’re not ahead. Your risk with RQI is not that the divy will be cut, it’s that you’ll wake up 1 or 2 years hence to find the price of the fund has gone nearly to zero, and when that happens the fund folds and you’re abruptly dead. You may think your clever and can get out before the fund goes to zero, but the rest of the world is on to this game and the price you’ll get for your shares will be less than what you paid and that loss will likely exceed anything you ever got via distributions. What you’d really like to have is a fund that’s actually earning it’s full distribution via NII; but that’s not RQI, so be careful.

    • Yes, you speak the truth. But if bond rates rise but the Fed funds rate stays low can we avoid the big hit?

10.91+0.02(+0.18%)Aug 31 4:02 PMEDT