BSTZ - BST: 9% Tech Yield At A Discount Vs. BSTZ

2023-10-20 09:15:00 ET

Summary

• The tech sector has gained ~32% in 2023, making it one of the top two sectors this year.
• BlackRock Science and Technology Trust and BlackRock Science and Technology Trust II offer attractive yields for income investors.
• BST has a higher dividend growth rate and yield compared to BSTZ, which has struggled in the rising rate environment.

While tech had a rough year in 2022, it's one of the top two sectors so far in 2023, with a ~32% gain. That's swell for traders, but what should income investors do in order to gain some income from this notoriously low-yielding sector?

As it happens, there are certain tech-based funds that offer you an attractive yield, such as BlackRock Science and Technology Trust ( BST ) and/or its sister fund, BlackRock Science and Technology Trust II ( BSTZ ). These are both closed end funds.

Fund Profiles:

BST:

BST is a perpetual CEF which began operations in October 2014 with the investment objectives of providing income and total return through a combination of current income, current gains and long-term capital appreciation.

Under normal market conditions, BST will invest at least 80% of its total assets in equity securities issued by U.S. and non-U.S. science and technology companies in any market cap range. BST's management sells covered call options on a portion of the common stocks in its portfolio. (BST site)

BSTZ:

BSTZ is a limited-term CEF. BSTZ began operations in June 2019 with the investment objectives of providing total return and income through a combination of current income, current gains and long-term capital appreciation.

BSTZ normally invests at least 80% of its total assets in equity securities issued by U.S. and non-U.S. science and technology companies in any market cap range, selected for their rapid and sustainable growth potential from the development, advancement and use of science and/or technology. BSTZ's management also sells covered calls on part of its portfolio. (BSTZ site)

BSTZ is the newer of the two funds - it IPOd in 2019. It has a larger asset base, of $1.54B, with ~3X the average volume for BST. BST has 33.5% of its assets exposed to covered calls, vs. 27.66% for BSTZ. BST has 105 holdings, vs. 106 for BSTZ. At 1.33%, BSTZ's expense ratio is a bit higher than BST's 1.11% figure.

Neither BST or BSTZ uses leverage. Both funds are managed by the same team; and both pay monthly distributions.

We wrote about BST and BST in a previous article , back in early July, when BST was up ~21% and BSTZ was up ~15%, vs. 38% for the broad Tech sector and ~15% for the S&P 500.

However, those stats have changed dramatically since then, with BST now up 10.6% and BSTZ down ~1%, in comparison to a ~35% gain for the broad tech sector, as represented by the Technology Select SPDR Fund ( XLK ), and 12.2% for the S&P 500.

What happened? We blame rising rates, which Mr. Market feels will hamper the ability of tech growth stocks to continue their strong growth. In addition, investors now have the first opportunity in a long time to latch onto some attractive risk-free yields. Hence, they dumped those investments they perceived as being riskier.

BST has outperformed BSTZ by wide margins over the past year and so far in 2023, with a 10.6% price gain in 2023 and a ~17.8% total return over the past year; while BSTZ is down ~1% in those periods. With rising rates pressuring growth stocks, it stands to reason that BSTZ would trail BST.

Dividends:

BST has an impressive five-year dividend growth rate of 26.3% due to a large 107% increase in 2021. At its 10/18/23 closing price of $31.17, BST yielded 9.62%.

BSTZ cut its dividend in March '23 from $.1920 to $.1613, and recently cut it again in October '23, down to $.1032. In early September, BlackRock announced that BSTZ would pay monthly distributions to shareholders at an annual rate of 6% of the Fund's 12-month rolling average daily NAV.

At its 10/18/23 closing price of $15.23, BST yielded 8.13%.

Taxes:

As of 9/15/23, 100% of BST's distributions for its fiscal year to date were comprised of return of capital, whereas 91% of BSTZ's distributions were return of capital, and 9% were from long term gains. Return of capital offers you a tax deferral advantage, but it lowers your basis, which will affect your tax bite when and if you sell.

Holdings:

While both funds have similar sector allocations, BST has a higher share of Software & Services and Financial Services, while BSTZ has more invested in Semiconductors/Services and Media & Entertainment.

As BSTZ focuses more on cutting edge technology companies, it's not surprising that it has a much lower exposure to large caps, and much higher exposures to mid- and small-caps than BST.

BST's geographic exposure is much heavier in North America, while BSTZ's exposure is much heavier in Europe and Asia Pacific.

BST's top 10 holdings comprise ~40% of its portfolio, and include many familiar large cap names, such as Apple (AAPL) and Microsoft (MSFT).

BSTZ's top 10 top 10 includes Nvidia (NVDA), at 4.79%, and Tesla (TSLA), 2.51%, but mostly favors lesser-known tech names, forming ~37% of its portfolio.

Long-Term Performance:

Looking back further, BST has had a 13.88% NAV return since its 2014 inception, and a 13.17% price return, as of 9/30/23.

BSTZ has had an 8.91% NAV return and a 3.7% price return since its 2019 inception.

Valuations:

Buying CEFs at a deeper than historical discount can be a useful strategy due to mean reversion.

At its 10/17/23 closing price of $31.65, BST was selling at a 1.25% discount to NAV, which is cheaper than its one-, three-, and five-year average prices to NAV.

However, BSTZ was showing a much deeper discount to NAV of 22.89%, which was also much cheaper than its one- and three-year average prices to NAV of -16% and -10.75%:

Parting Thoughts:

BST offers a more stable dividend and a higher yield than BSTZ, which has struggled mightily in this rising rate era, and will probably continue to struggle until rates start to ease. If you're looking for income from tech, BST can offer an attractive yield at a discount, with less volatility than BSTZ.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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