GLU - Closed-End Funds: 2024 Revisit Of Funds That Never Cut Distributions With Inception Pre-2008

2024-05-26 21:16:20 ET

Summary

• Closed-end funds tend to cut their payouts over time due to negative consequences of leverage during market crashes, leading to potential permanent capital destruction.
• Today, we are looking to revisit the six funds that have inceptions prior to the 2008/09 Global Financial Crisis that have still never cut their regular distributions.
• A long history of no-cuts can be important for income-focused investors, but we also examine coverage and valuations to determine whether they are worth exploring further.

Written by Nick Ackerman, co-produced by Stanford Chemist.

Income investors tend to look for investments that can pay steady dividends, and when evaluating choices, which can mean those that have a long history without any cuts. Closed-end funds, perhaps notoriously, almost always eventually tend to cut their payouts over time. This is because a large portion is leveraged, so when a crash comes, those downside moves are amplified, and that tends to lead to potentially permanent capital destruction.

However, the simple fact is that CEFs tend to pay out the majority of their earnings. Therefore, they are going to be more susceptible to cuts rather than increases naturally. One of the reasons a C-corp can grow its dividends over time is that it retains earnings and uses that to attempt to grow future earnings; thus, as earnings grow over time, so can what the company is paying out to investors....

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