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Aberdeen Asia-Pacific Income Fu Message Board

  • flipper_58 flipper_58 Nov 7, 1998 3:17 PM Flag

    Risks and High yield funds.

    I've had some off-line e-mail questions asking
    how funds like this one can pay such high divdends
    when rates are so low, if it's OK I'll answer here.
    The answer is premium bond leveraging. Justacomment
    touched on this a few posts ago.

    A premium bond is
    a bond that was issued in the past when interest
    rates were higher. Since rates have droppped the price
    of the bond increases to reflect current rates. For
    example a 10% gov't bond you probably would have to pay
    $1,600-$1,700, for a bond that will mature at $1,000. By paying
    more brings it's yield down, $100/$1,650=6%. In the
    meanwhile your coupon payment is 10%, above the market rate
    of %5. MOst premium bonds yield higher since, in
    essence, your taking aftertax money, buying a premium
    bond, and getting higher than average dividends in
    return, which of course are taxable.
    Now when looking
    at a high yield fund they can play games. They
    report "net investment INCOME" and pay dividends
    according to that number. The 10% earned on the bond is
    reported in the net investment income. What's not really
    considered is the big premium paid to get that 10%. Also
    funds that leverage can make the numbers screwy too.
    They pay 5.5% to borrow money and buy 10% premium
    bonds that YIELD 6%. What this does is allow funds to
    pay VERY high current income. The very real downside
    is the principle of the fund is eroding(it's called
    amortizing) at an accererated rate as a result of the premium
    bonds aging and maturing.
    This is why awhile ago I
    mentioned protecting your principle is critical in these
    funds. They're not buy and forget type funds. That's why
    I generally will never buy "general" U.S.high yield
    funds unless their is a unique time to get in.
    don't mean to be to negative. I think FAX is unique
    since the AUD, it's Asia investments, etc. could
    provide the capital appreciation needed to off-set the
    normal accelerated principle erosion from buying and
    leveraging premium bonds.

    I hope this is clear,

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    • After a stock reaches the ex-dividend date the
      stock price is automatically adjusted lower to reflect
      the dividends paid. Most investors don't see this
      because they don't pay close attention to the price of
      the stock on a daily basis. If you buy a stock before
      the ex-dividend date you're actually hurting yourself
      because the dividend is taxed as ordinary income to you.
      Wait to buy immediately after the date at the new
      adjusted price. When you later sell you will have a lower
      "capital gain" tax to pay on the gain instead of paying
      the higher "ordinary tax" on the dividend. Don't let
      a broker entice you buy a stock before the date so
      you can get the dividend. It's illegal (it is call
      "selling the dividend". I've been watching FAX for a
      little while. Handsome dividend, but I am cautious about
      the risk. It does, however, look very attractive at
      these levels.

    • Price of FAX always fall before rights offering.
      Also,there is always an increase in volume post offering as
      people flip their shares.Finally,FAX moves toward its
      NAV as we move away from the rights offering.This
      stock has acted this way with each offering before this
      one.To the person who asked before-yes Prudential was
      the original underwriter in 1986 @ $10.00/share;while
      this stock has traditionally paid high dividends,its
      price has collapsed by 40% over 12 years while the
      broader markets has advanced several fold

    • If you look at Yahoo's five day chart it is very
      unusual looking at least to me. I first noticed it over
      the weekend (Mon & Tue of last week had similar
      narrow trading ranges) and it is continuing this

      My possibles are:

      1) the shorts are buying
      back their positions and are being very
      careful/skilled to not run up the price.

      2) A buyer is
      carefully/skillfully buying a lot of stock without running up the

      3) Both of the above with the market maker assisting
      in some way that I don't understand.


    • I doubled what I could buy through the rights
      offering the last 2 times and hope it will eventually pay
      off. I am not too well informed, and appreciate the
      input from those of you who seem better informed than
      I. I felt this was a long term investment from the
      start but am concerned with that outlook! It would take
      about 6.75 to break even with what I have paid and the
      dividend would be the gravy on top of that. I would like
      to hold and go for some appreciation, any input?

    • to .06/share divd.

      By the way, FAX was raised to STRONG BUY yesterday.

    • You bought it 10/27 which means it settled(you
      paid for it) by record date, YOU WILL get the
      dividend. Ex-dividend means if you bought it that day you
      would not beable to settle the trade prior to
      settlement day.

      Don't go spending it all in one

    • Thanks to all for the clear explainations.

      I bought FAX on Oct 27. Sooo... I reckon that since x-dividend date was Oct 28, I was not, as yet, "of record" I'm out 6 cents.


    • The pros are the ones making money investing in
      FAX and the cons are the ones running the fund. Just

      Please read message 603 is gives an excellent
      explanation of one critical aspect of FAX.

    • I'm clueless as to wht this stock does, thought about buying on
      Prudentials recommendation but have no idea where to find research on this stock or how it trades. Any Help?

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