So: the underlying assets yield 4 to 5%, maybe 5.5% for some (like T). The fund pays its managers 1.4% for fees and expenses. Yet the fund shares pay out more than 8% in monthly cash distributions? What part of this doesn't indicate a free lunch?
Answer: the high payout is supported by 2 things: (1) leverage, and (2) return of capital. The Fund is about 35% leveraged, and the cost of those borrowed funds is very low due Fed keeping short term interest rates at historically low levels. So, that gets the leveraged return on equity up from say 5% (of the underlying assets), to say 7% ($1 billion of assets earning a very hefty spread).
The final approx 1%+ is made up by return of capital.
So there you have it: free lunch. Can't this just go on forever?
yes. free lunch is good as long as the market is still good. while most CEFs are traded at discount, this $2B fund is traded at 25% premium. I think sooner or later the market efficiency will kick in as the market went south recently.
The price of free lunch has gone up, about 5% more per share than when you posted. Please, tell us more about NAV,ROC,div cuts,leverage,free lunch, etc. I want to sell shares I bought a year ago @$5 in my taxable account at a 52 week high, in time to fund our summer vacation.
Congratulations! Looks like you bought the shares that traded at $5 in the 5/6/10 'flash crash'. Well, you've anniversaried for one year, so you now have a LT gain. I can't really guess what the share price will be, so it's up to you when you wish to fund your vacation. Where ya goin?
You are correct. You don't have to keep track of anything in an IRA. It doesn't matter how you get there - dividends, interest, ROC, pre-tax contributions, you pay tax on the amount you withdraw at your regular tax rate. The only thing you have to keep track of is any "basis" you may have as a result of making a post-tax contribution in a traditional IRA.
In a taxable account, you do need to keep track of the ROC, which lowers your basis when you sell.
It's a free lunch until you go to sell and you find that most or all of the money you receive is capital gains due to many distributions containing ROC.
Keep in mind you must subtract ROC from your purchase price at the time of sale which, of course, adds to the capital gains thing. Good luck and this is just FYI.
Okay, Jackomusic2, point taken. However, then if DNP shares are held in a non-taxable account, say an IRA, or by a non-profit institution, the holder is back to free lunch. Free lunch, right? Everytime someone is serving free lunch, the line should be going around the block. Is that the case here, with DNP?