We’ve Seen a Boom (and 12%+ Dividends!) in a Specific Kind of Stock Close-End Fund (CEF) this year – and All My buy indicators show that this profitable play is still in its early stages.
Specifically, I’m talking tech focused CEF – giving us a second chance to buy thanks to last week’s earnings Apple (AAPL) And Alphabet (Google).
Buying a technology CEF is like buying an ETF focused on technology, but with two key differences:
- Big Dividend: The CEF we’re going to analyze today yields 12.1%—and it also pays monthly dividends. You and I know that both of these things are unheard of in the world of “regular” stocks and funds.
- Big Discount: This fund offers a 12.2% discount to net asset value (NAV)—CEF—that’s to say we’d pay just 88 cents for every dollar of its assets!
fund is called BlackRock Science & Technology Trust II (BSTZ). We’ll get to the “second” part in a moment. But first, it’s worth stopping to consider that this fund is up more than 20% in just one month in 2023.
Then there are dividend payments, which exceed $100 per month for every $10,000 invested.
We’ve got even more possibilities with BSTZ. Because unlike ETFs, this fund has two ways to deliver value gains: through the appreciation of its portfolio — which is still worth little because of last year’s selloff — and its 12% discount to NAV. As the discount shrinks (and flips at a premium; likely, in my view), it will pull the price down further.
But is that 12.1% dividend yield sustainable?
It’s always a good idea to question a yield this high, so let’s go ahead and pick apart the elements that support it.
BSTZ is a relatively new fund, launched in June 2019, so we don’t have much to say about its history, but it Is Raised dividend three times since inception (once in 2020 and twice in 2021, plus a nice special dividend that same year). This is a good start. And there are other signs that we can count on BSTZ’s dividend.
While the fund doesn’t have a long track record, its big brother, Blackrock Science & Technology Trust (BST)Odds has been increasing payouts for nearly a decade while offering special dividends.
This is our first clue that BSTZ’s payouts are sustainable: both funds are managed by the same group, and BST’s history of increasing responsible payouts indicates that BSTZ’s future payouts will likely go up, not down. And our second clue is even more compelling.
Since BST’s portfolio has nearly tripled in less than a decade – even Afterwards The big tech sell-off of 2022—the fund has made enough gains to keep making payouts for many years to come.
Not surprising considering its portfolio. Despite the technology struggle last year, Apple (AAPL), Microsoft (MSFT), Mastercard (MA), And Visa (V) Has been a tremendous long-term outperformer. They are also BST top positions, and these, in addition to the fund’s investments in the tech world, have caused the line in the above chart to move up and to the right for years.
While this does not necessarily mean that BSTZ can do the same, it is another encouraging sign.
A Quick Guide to Sustainable CEF Dividends
There’s another strategy you can use to see if CEFs are likely to stay paid, or if there’s a risk of a dividend cut.
The key is to look at the fund’s long-term total NAV return (or the return of its underlying portfolio including dividends) and compare that to the fund’s payout. This calculation is a good first step in determining whether a CEF can maintain its current payout level.
Since inception, and following the worst decline in tech stocks since the Great Recession, BSTZ’s 8.7% average annual total NAV return suggests a sustainable 8.7% yield on NAV.
Don’t ring the alarm bells now! Because BSTZ’s 12.1% yield is based on its (discounted) market value. And the fund’s 12% discount means that on a per-share NAV basis, BSTZ’s yield on NAV (or what management has to do with the market to give it its 12.1% yield on market value) is just 10.6%, which is handy. Get over 12.1%.
Now let’s assume that the bear market of 2022 was an aberration – a very realistic assumption, as technology continues to advance every aspect of our lives and will continue to do so for decades to come. This makes BSTZ’s 12.1% yield extremely stable: before 2022, its annualized return was 38.9%, or more than triple its current yield.
Michael Foster is Lead Research Analyst opposite point of view, For more revenue ideas, click here for our latest report”Perpetual Income: 5 bargain fund with steady 10.2% dividend.,
Credit: www.forbes.com /