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DNP Select Income Fund, Inc. Co Message Board

  • Eggplant101 Eggplant101 Apr 11, 2011 4:25 PM Flag

    DNP offers free lunch

    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?

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