i was having a dialogue with fxdude on some topics in another thread and thought i’d start this new one as the other one has so many messages.
THE REAL YIELD OF AWP
i took a look at the 4/30/11 annual report and found the following (#’s in millions)
div inc 22.5 fees 5.8 net 16.7
so over six months they recvd 22.5 in divs, had fees of 5.8 (including 4.5 advisory fee), to give the net 16.7. the NAV at the beginning of the period (oct 2010) was 890. so the yield was 1.9% (16.7/890) or 3.8% annualized. If you back out the fees, it is 2.5% or 5.1% annualized. while they have investments that yield north of 10% per annum, the average yield is 5.1%. imho, not real hard to pick some real estate stocks or etf’s to generate a 5.1% return via dividends. not counting any capital gains or losses here.
they reportedly use a ‘dividend capture’ strategy which may allow them to get 6 dividends a year rather than 4 for the typical stock but no way to know how much that adds to the yield.
HOW TO DETERMINE RETURN OF CAPITAL
basic example. if you invest 10 (your capital) in a fund (you buy one share at 10) and they pay you 1, the fund should end the year at 10 or higher. you get the 1 and your investment is still worth 10 so no return of capital. if the fund ends at 9, then the 1 you recvd is return of capital. so i always focus on the NAV of the fund. if XAWPX starts the year at 8 and pays .60, it should be 8 or higher at end of year. if it is 7, the mgrs paid you back your own .60 and lost another .40.
you can’t really pay attention to the accounting policies that term things ‘return of capital’. here is an example i use to explain this. i buy SPY at 120 and write a 123 call and collect 2. the following month, SPY is at 122 so i made the 2 in call money and i still have my capital (in fact, i got 2 and my capital increased by 2, from 120 to 122). I think the nuance comes in if SPY goes to 130. my shares are sold at 123 so I get my 120 capital back plus 3 cap gain plus the 2 in call money. so technically, capital was ‘returned’ but it was returned at a profit and i would immediately reinvest it. many of the covered call CEF’s show high return of capital but it isn’t really accurate in my mind.
one item that can be debated is when you buy a CEF at a discount. you pay 10 but the fund NAV is 11 and they pay 1 during the year and the NAV ends the year at 10. assuming the fund is then trading at or above 10, you still have your capital and you got 1 so no return of capital. but i think a standard discount for a CEF is 10% so I would call this return of capital, the mgmt team didn’t do anything to increase the NAV during the year. they just paid out 1 of the 11 they started with (same time you bought). if the discount is 25%, then it may not be accurate to call a decline in NAV return of capital.
my internet has been having some problems. i wanted to throw out some estimated yield figures using XAWPX and AWP at 9/30. assuming the div income per year is still approx. 33.4 million, 33.4/672 (XAWPX total value) is 5.0% and 33.4/585 (AWP total value) is 5.7%. so AWP holders are set to receive 11% in dividends and half that should be covered via dividends recvd from the investments that make up the NAV. Of course you have to hold for 12 months to get the 11% !!! but the good news is the value of the NAV and AWP are up in october so that helps make up the difference btwn the divs recvd and the divs paid out.