AOD - AOD: Highly Diversified Portfolio Steady Monthly Payouts Consistent Strong Yield

2023-07-18 12:34:10 ET

Summary

• Almost 40 percent of abrdn Total Dynamic Dividend Fund’s assets are invested in healthcare and ICT stocks. Remaining investments are highly scattered among various other sectors.
• AOD’s technology portfolio seems futuristic and delivered impressive price growth. But investments in pharmaceutical stocks failed to generate returns.
• AOD offers strong and steady monthly payouts, with an equally strong and steady yield. However, it failed to generate strong price growth over the years.
• AOD’s current portfolio has a relatively low average price to earnings (P/E) of 15.1, and the fund is currently trading at a significant discount of 12.4 percent.

~ by Snehasish Chaudhuri, MBA (Finance).

abrdn Total Dynamic Dividend Fund (AOD) is a closed-ended equity mutual fund, or CEF, that invests in growth and value stocks of large-cap companies spread across diversified sectors and listed in various markets across the globe. AOD has a relatively large asset base of $976 million, but has a very high expense ratio of 1.16 percent. The high expense ratio primarily resulted from an equally high turnover ratio of 0.83 percent. Such persistent portfolio reconstruction seems beneficial for this fund, as it was able to offer steady monthly payouts and generate 8 percent-plus yields over the past 10 years on a consistent basis.

AOD Offers Steady Monthly Payouts, Generates Consistent Strong Yields

Abrdn Total Dynamic Dividend Fund was launched and is managed by Alpine Woods Capital Investors, LLC. In order to create its portfolio, this mutual fund conducts in-house research and employs fundamental analysis with a focus on factors like special dividends and dividend capture rotation. The primary investment objective is to seek high current income, with a secondary objective of capital formulation. AOD benchmarks its performance against that of S&P 500 TR Index (SP500TR) and MSCI ACWI Index (ACWI).

Abrdn Total Dynamic Dividend Fund was formed on October 27, 2006, and has been paying monthly dividends since then. Payouts were quite steady over the past 10 years, and ranged between $0.54 and $0.575. The fund also generates strong yield . Trailing-12-months yield stands at 8.31 percent, whereas annual average yield over the past 10 years was almost 8.5 percent. More than 55 percent of AOD's assets are invested in the equity markets of the United States. Another 30 percent is invested in the markets of France, United Kingdom, Netherlands, Spain, Germany, Switzerland, and Canada. The fund has no investments in equity markets of India, Indonesia, or Mexico.

AOD's Technology Portfolio Seems Futuristic & Delivered Impressive Price Growth

Major investments of Abrdn Total Dynamic Dividend Fund include 10 ICT stocks, half of them are in the business of semiconductors. Investing in BE Semiconductor Industries N.V. ( BESVF ), Broadcom Inc. ( AVGO ), Taiwan Semiconductor Manufacturing Company Limited ( TSM ), Analog Devices, Inc. ( ADI ) and ASML Holding N.V. ( ASML ) suggests that the fund has a futuristic outlook. Besides, a significant part of its portfolio is invested in technology hardware companies Apple Inc. ( AAPL ) and Cisco Systems, Inc. ( CSCO ); system & application software developers Microsoft Corporation ( MSFT ) and Alphabet Inc. ( GOOG ); and IT consulting company Amdocs Limited ( DOX ). All of these 10 stocks had positive price growth in 2023 and also during the past five years. Barring DOX and CSCO, all other stocks registered a price growth in excess of 6 percent this year, and at least doubled during the past five years.

AOD's Investments in Pharmaceutical Stocks Failed to Deliver Impressive Growth

Abrdn Total Dynamic Dividend Fund also invested in stocks of few large-cap pharmaceutical and medical devices manufacturers such as AstraZeneca PLC ( AZN ), Roche Holding AG ( RHHBY ), Sanofi ( SNY ), Eli Lilly and Company ( LLY ), AbbVie Inc. ( ABBV ), Medtronic plc ( MDT ), Bristol-Myers Squibb Company ( BMY ) and Merck & Co., Inc. ( MRK ). Almost 30 percent of its assets are invested in these 18 stocks. From these we can understand how evenly distributed AOD's investments are among 87 of its holdings. However, unlike its technology peers, healthcare stocks did not deliver impressive price growth. Only LLY was able to register price growth over 20 percent in 2023 and more than 100 percent over the past five years. Most stocks failed to register positive growth this year, and 6 percent price CAGR over the past five years.

High ROC Utilization May Discourage Investors From Accumulating Units of AOD

Instead of earning huge dividends in its investments, Abrdn Total Dynamic Dividend Fund generates capital growth from returns of its component stocks and then transforms them into monthly dividends. Due to poor equity price growth in 2022, AOD utilized more than 50 percent of its return of capital for its monthly disbursements. It may raise some eyebrows, but it is quite normal for CEFs offering monthly pay-outs to utilize its ROC when the underlying risks are just not there. As global stock markets are yet to start posting consistent positive growths, I expect similarly high ROC utilization to persist in 2023, too.

Alternatively, the fund may lower its monthly distribution. Fortunately, AOD has a low beta. Thus, it could be less volatile despite its high utilization of ROC. Long term, however, a high utilization of ROC can be destructive. 53 percent ROC utilization for payouts is no way sustainable in the long term. This is one factor that surely will discourage investors to buy further units of this fund.

Investment Thesis

Almost 40 percent of its assets are invested in healthcare and Information & communication technology. While AOD's technology portfolio seems futuristic and delivered impressive price growth, its investments in pharmaceutical stocks failed to deliver impressive growth. Remaining investments are highly scattered among various other sectors such as energy, utilities, industrial, retail, banking, insurance, financial institutes, automotives, basic materials, food & beverages, etc. Overall, Abrdn Total Dynamic Dividend Fund failed to generate strong price growth both in the short-run as well as in the long-run.

However, Abrdn Total Dynamic Dividend Fund is a dividend paymaster. It offers strong and steady monthly payouts with an equally strong and steady yield. Consistent 8 percent plus yield should be enough for income-seeking investors. Its highly diversified portfolio and futuristic outlook of investing in a large number of semiconductor stocks also is a big positive. Stocks included in AOD's current portfolio have a relatively low average Price to earnings (P/E) of 15.1 and the fund is currently trading at a significant discount of 12.4 percent.

This discount may also look tempting for accumulating further units of abrdn Total Dynamic Dividend Fund. However, I'd prefer not to buy further units due to lack of price growth.

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