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,
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
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?
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
Don't go spending it all in one
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.