Dividend Dreams

Recently, two CEFs (AOD & AGD) from Alpine were forced to cut dividends by a large margin. Those of you counting on the income may be somewhat shaken by the news, but I think it will be for the best. The methods they use for income revolve around rotating holdings based on dividend payments. With recent cuts or reductions by the companies they hold they were forced to employ some leverage and churn holdings at a rate of nearly 650% annually. I think that with the reductions they will churn less and reduce leverage. I believe that the end result will be a full recovery of these CEFs over the next year or so as the general economy worldwide improves. I would expect the monthly payouts to remain the same into the 2nd quarter of 2011 and then get a slight increase.

The third Alpine CEF, AWP, reduced dividends a while back and has been doing fairly well since. It has also raised its dividend once since the initial cut. Not too bad for a fund that is essentially a REIT.

Also keep in mind that all three pay out any unpaid income at the end of the year.

As the passage of some sort of health care reform gets closer to reality I can’t help but be fearful. I have no doubt that something is going to be passed by early next year. And while I have no doubt that some folks will benefit from the new measure I strongly feel that most of us are going to be screwed over big-time!

Both the House and the Senate version provide exclusions for those with religious objections and those who can prove financial hardship. In my opinion the latter group are those that they are working to cover the most. They are also the group that will continue to use the emergency rooms and primary doctors and likely end up paying little or nothing for the services provided.

There is also a big difference between those who cannot pay for services and those who choose not to. I’m guessing that there are many families that have no health care that have cell phones for every member of the family. They certainly have the option of having insurance but instead chose the phones. I understand that the health care would likely cost more than the phones but my point is they made a choice about what was more important to them. Is the government going to decide what you are allowed to have and still qualify for the ‘financial hardship’? Is it going to be based solely on income?

In the House version of the bill Illegal immigrants can purchase health care from exchanges but get no subsidies. In the Senate version they cannot buy even if they can pay full price. It boggles the mind that this was even a point of discussion!  We are talking about ILLEGAL immigrants. Pack them up and ship them home. LEGAL immigrants are welcome and should be integrated into the system the same as citizens.

Governmental ineptitude will likely turn this into a major disaster that will continue well into the future despite all the problems it will have. Once another ‘entitlement’ is in place it is a political career busting move to take it away. Let me give you an example well the government handles a somewhat similar program: Auto Insurance. Forty-nine states require auto insurance in order to drive your vehicle on public roadways. New Hampshire is the exception. It is breaking the law not to have minimum coverage in the others. Yet here in Ohio the only ‘proof’ you need to have when getting your license or plates is to sign a form saying you have insurance. How is that proof? If that is the best they can do how will this pan out when applied to the entire population of the country?

I certainly don’t have the answers to all the questions regarding healthcare reform. But for as much as it is going to cost I think it is certainly worth taking more time to get it right rather then jam it throught the system for short-term political gain.

This article posits that bankers should be given chunks of toxic assets as a bonus instead of cash or stock. I think it’s a great idea although I’m not sure exactly how it could be implemented.

Article

What do you think about the idea?

There is plenty of history about how dividend reinvestment can help an investor capture great returns. Some examples of possible returns can be found here and here. I believe that dividend reinvestment is a very smart way to go up until the time you need the income stream. I’m not so sure about individual DRIPs though unless you want to just set-it-and-forget-it or don’t hold any ETFs or CEFs.

Due to the way ETFs and CEFs trade they have the the ability to trade at a premium or discount to the actual Net Asset Value (NAV). Because of this I believe that an investor who takes an active role in the direction of their account can do better than a DRIP.

Let’s just say that you are the type who only peeks into your account once a quarter. You check your account in October and have your dividend cash sitting idle in your account. Let’s also say that you hold two of my favorite funds: AOD and AWP. As of today AOD is trading at a 21% premium while AWP is at an 18% discount. If reinvesting today you will get more value for your money buying the fund that is trading at less than the NAV. In fact, there is quite a spread between these two and AWP would be a much better value.  Repeating this check each time you want to deploy your funds should yield better returns than simply plowing your money back to the original source every time.

You can also use this method to re-balance your portfolio in a way. You can divert your dividends into whichever fund or asset type you want to grow in oder to shift the balance. That way you don’t have to sell a great asset to boost a different asset class. This may not work fast enough for you as you get ready to retire but is a nice way to adjust leading up to that point.

What are your thoughts?

After a bit of contemplation I think there is a relatively simple way to spare some pain for the banks and stimulate the economy. In simple terms this is the plan I think could help:

Mandate that mortgages for non-investment homes be capped at the principal plus 1% interest for six months. After that, the interest rates rise 1% every six months until they reach the original rate. If variable, cap the rate around current rates or slightly higher. The interest is simply waived, not held back to be applied later.

People will potentially have hundreds of dollars more a month to spend and the banks deal with far fewer foreclosures and losses at the expense of some profit. By the time rates are back to the starting point the economy should be vastly improved from its current condition. This alone should would be a major stimulus without putting the country further in debt.

Unlike other plans getting consideration it also benefits those who were fiscally responsible. We have to stop rewarding foolish behavior!

On these pages I hope to offer some investment options for your consideration. You should do your due diligence and decide for yourself whether to add them to your portfolio. I am not pushing anything here and have no involvement with any Stock/ETF/CEF that may be discussed. They are all merely what I am investing in or considering for future purchase.

My main goal is to locate  funds that pay nice yields and are as safe as they can be considering the overall market and/or the category of the fund. I do occasionally sell positions to take some profit or minimize a loss, but I buy intending to keep them long term.

Hopefully you will find something of interest and join in discussions of items that interest you. I would love to have additional insight regarding funds you consider worthy of your hard-earned money as well.