BTAFF - DNIF: High-Yielding Diversified Equity CEF Trading At An Attractive Discount

Summary

• DNIF recorded a high average annual return over the long run, and is currently trading at an attractive discount of 33.35 percent from its net asset value.
• DNIF generated strong yield during the past three years. Even in the years DNIF failed to generate high yield, it has still been strong enough at 6 percent.
• DNIF’s portfolio of investments belonging to consumer products and basic materials sectors performed reasonably well both during the short run as well as the long run.

~ by Snehasish Chaudhuri, MBA (Finance)

Dividend and Income Fund ( DNIF ) is a closed-ended equity mutual fund (CEF') that invests in dividend paying equity stocks across diversified sectors all around the globe. The fund also invests through CEFs, open-ended funds, business development companies, exchange traded funds (ETF'), and real estate investment trusts (REITs). It also uses leverage , although for a very small proportion of its entire portfolio. DNIF employs fundamental analysis and emphasizes on yield, profitability, financial strength, growth potential, risks, etc. in order to create its portfolio. DNIF pays quarterly dividends, generates a strong yield and has recorded a very high overall return of more than 16 percent during the period between 2016 and 2021. It is currently trading at $11.61, which is an exceptionally high discount to its NAV.

DNIF Invests in Stocks from Consumer Products and Basic Material Sectors

Dividend and Income Fund was launched by Bexil Advisers LLC. almost 25 years back. It was launched as Chartwell Dividend & Income Fund Inc. Later on, it voluntarily withdrew its shares’ listing from the New York Stock Exchange effective on October 8, 2020 following the close of regular trading. And on October 9, 2020 the shares started quoting on the OTC market with its current ticker of DNIF. The fund benchmarks its performance against the Standard & Poor's 500 Composite Index. The fund has an expense ratio of 1.79 percent. The prime reason behind such a high expense ratio is that the fund has a limited number of stocks along with a turnover ratio of 37 percent. Even considering all these, the expense ratio is quite high.

Dividend and Income Fund has an AUM of $220.66 million. If selected carefully and acquired at reasonable price points, CEFs that offer broad diversification, consistent high yield, and market-beating total returns in the long term, are considered attractive investment opportunities. The composition of the portfolio of stocks also plays a major role. I always try to find out what percentage of an equity fund is composed of stocks belonging to the industrial, financial, healthcare and technology sectors. In the case of Dividend and Income Fund this proportion is only 38 percent , while in many other funds I covered this share ranges mostly around 70 percent. These sectors, in my view, have the maximum growth potential in the coming decade. However, as this fund invests mostly in dividend paying stocks, a significantly high percentage of its assets (almost 52 percent) has been invested in stocks from consumer products and basic material sectors.

Composition and Performance of Top Holdings of Dividend and Income Fund

Significant investments in these two segments were made in stocks of Steel Dynamics Inc. ( STLD ), AutoZone, Inc. ( AZO ), British American Tobacco p.l.c. ( BTI ), Tractor Supply Company ( TSCO ), Westlake Corp ( WLK ), U-Haul Holding Co ( UHALB ), Williams-Sonoma Inc ( WSM ), Asbury Automotive Group Inc ( ABG ), Dollar General Corp ( DG ), Robert Half International Inc ( RHI ), Rio Tinto Group ( RIO ), The Home Depot Inc. ( HD ), BHP Group Ltd ( BHP ), B2Gold Corp ( BTG ), and Nexstar Media Group Inc ( NXST ). During the past one year, when almost all the stocks generated negative price growth, most of these 15 stocks had a positive price growth. STLD grew by almost 97 percent. BHP, UHAL.B, AZO, NXST, WLK, BTG, ABG, RIO and DG -all grew in between 6.5 to 21 percent. Over the past five years, barring BTG, UHAL.B, WLK, and BTI, all other stocks grew in excess of 6.5 percent CAGR.

Within the industrial, financial, healthcare and ICT sectors, DNIF invested in Credit Acceptance Corp ( CACC ), Essent Group Ltd. ( ESNT ), T. Rowe Price Group, Inc. ( TROW ), UnitedHealth Group Inc ( UNH ), Molina Healthcare Inc ( MOH ), Discover Financial Services ( DFS ), Elevance Health Inc. ( ELV ), AMN Healthcare Services Inc. ( AMN ), Alphabet Inc ( GOOGL ), and Barclays PLC ( BCS ). As I mentioned earlier, most stocks had a poor year during the past 12 months, and all these 10 stocks failed to generate a price growth of at least 6.5 percent. Over the past five years, however, six out of these ten stocks (MOH, UNH, AMN, ELV, GOOGL, and DFS) grew in excess of 6.5 percent CAGR. This sums up how DNIF’s portfolio performed over the years - investments belonging to consumer products and basic materials sectors performed reasonably well, and remaining stocks moved in sync with the broader market.

Investment Thesis

The Dividend and Income Fund generated a strong yield during the past three years, averaging almost 9 percent, and also recorded a high average annual return over the long run. Prior to that (2017 to 2020) yield ranged between 6 to 7 percent. This makes this fund inconsistent in terms of yield. However, the yield is good enough for income-seeking investors. The fund has an AUM in excess of $200 million and invests mostly in the U.S. market and U.S. multinational companies. The fund also makes effective use of leverage, and the leverage part is not out of proportion. The portfolio consists of stocks primarily from two sectors - consumer products and basic materials. The major holdings from these sectors also have performed reasonably well over the years, especially at a time when the broader market failed to perform.

Although its investments in stocks from technology, industrial, healthcare and financial sectors, have failed to deliver return over the past 12 months, have recorded significant growth over the long run. Since investors of this fund rely on the dividend yield, sustainability of its current level of yield is very important. In my assessment the fund undertakes a high, but acceptable degree of risk, as the sectors that this fund focuses on are more volatile and are cyclical in nature. In addition, the fund also has a very high expense ratio. The current level of yield is quite strong, and doubt remains over its sustainability. However, as I mentioned earlier, even in the years DNIF failed to generate high yield, it has still been strong enough at 6 percent. It is also trading at an attractive discount of 33.35 percent. In that sense Dividend and Income Fund can surely be an attractive option for income-seeking investors.

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