not long ago, i made some calcs assuming i had $10,000 and needed to generate 20% return using 35% div capture and 65% buy/hold. i assumed 8% yield on the buy hold side. so i'm targeting $2,000 income and my buy/hold is giving me $520 ($6500x.08). so now i need to generate a 42% return on my $3,500 basket in order to get to $2,000.
in theory, mgmt may be able to find 6 companies that pay an annual dividend of 7% (one time, not qtrly) and capture that 6 times. that gets you 42%. there are companies that pay a one-time annual dividend of 7%. take a look at MTA, it pays annual in may and the yield is now 14%. i used to own MTA but got stopped out in the low 20's earlier in the year. i'm sure mgmt has many of these companies on their radar as they've been in this div capture strategy for years.
now i think this is a bit of a stretch but it may be possible. so i'm not doing the big sell job on this fund, just pointing out a theoretical possibility. i do believe the div capture strategy can be used w/o a serious impact on NAV. yes, there are some higher expenses due to churn and it certainly works better in an up market than a down market.
as has been noted many times, it really boils down to the special dividends - akin to return of capital. i may be mistaken but my recollection is the analysts that cover this company have not asked how much of the div income was generated via special dividends (per my read of the last call transcript about two months ago, maybe i missed it). and i don't believe this info is broken out in the financials. it would be nice to hear an analyst ask this question as they get paid for this type of stuff.
the other key item is of course, mgmt. given the drop in the stock markets, i think a prudent mgmt team would divert a portion of their income to asset purchases at this time. to me, it isn't really a debate about whether they can generate 15% or 20% (or maybe even 12.5%). whatever the number is.
the deal here is how to make money for your investors. i know high current income is the primary goal with capital appreciation/preservation coming in second. but it seems to me that a smart mgmt team would start to look at capital appreciation as a way to generate high current income in the next 12 to 24 months.
so let's hope that mgmt does cut the dividend, even though they may still be able to generate the income necessary to maintain it. cut it by 30% and use the money to invest on the buy/hold side. a 50% return on buy/hold over 12-24 months from now is not a big stretch in my mind.
and i'm guessing the markets will go lower from here so averaging in over the next six months is really, really key.
i really hope mgmt comes out with a clear presentation on their results for 2008 and very coherent strategy for the future in their next call.
disclosure: hold AGD and AOD. no purchases in quite some time as i'm not "sold" on mgmt strategy at this time. but i'm giving them time as no mgmt team has done well this year.