PDT - PDT: Don't Be Fooled By The Price Performance This 9.10%-Yielding Fund Is Not Bad

2024-02-19 07:57:04 ET

Summary

• The John Hancock Premium Dividend Fund offers investors a high level of income from a combination of fixed-income securities and common stocks.
• The fund's 9.10% yield is attractive for investors seeking a high level of income, and it is surprisingly in line with what is available from fixed-income funds.
• The fund's performance has lagged behind the market, with a 4.56% decline in share price since the last article was published.
• The fund's NAV performance has been much better than its share price performance, as the NAV has actually gone up since July.
• The fund appears capable of sustaining its distribution going forward.

The John Hancock Premium Dividend Fund ( PDT ) is a closed-end fund that can be purchased by investors who are looking to receive a sizable amount of income from the assets in their portfolios. Unlike most income-focused funds though, this one does not focus its investments solely on fixed-income securities, so it is not necessary to sacrifice some upside potential in order to achieve this high level of income. This is because the John Hancock Premium Dividend Fund invests in both fixed-income securities and common stocks. The latter provides a certain amount of protection against inflation as well as provides the potential to profit from economic growth. Unfortunately, the presence of the common stocks in the fund's portfolio also reduces its income compared to what a pure fixed-income fund would have. After all, common stocks have substantially lower dividend yields than preferred stocks or bonds. We can see this quite simply in the fact that the S&P 500 Index ETF ( SPY ) only has a trailing yield of 1.33% at its current price. Even the supposedly high-yielding utility sector ( IDU ) only yields 2.84% at today's level. All of these are well below the 5% to 5.50% that can be obtained from a good money market fund, let alone the higher yields that are available in the fixed-income space. Despite the substantial presence of common stocks in the fund's portfolio though, the John Hancock Premium Dividend Fund still boasts a 9.10% yield today. That should be enough to satisfy any investor who is seeking a very high level of income.

As regular readers can no doubt remember, we last discussed the John Hancock Premium Dividend Fund in mid-July 2023. It would be an understatement to say that this was a very different market environment than we have today. After all, during the summer of 2023, the market was digesting the very real possibility that high interest rates would be with us for quite some time and investors were generally pulling money out of both common stocks and fixed-income securities. When interest rates are very high, it is possible to obtain an acceptable return on investment without taking on much risk simply by parking your money in a money market fund. However, starting in mid-October, both the stock and bond markets rallied as investors began to expect that the Federal Reserve would shortly pivot and start reducing interest rates. As such, we can expect that the shares of the John Hancock Premium Dividend Fund would have exhibited some weakness for the first few months following the publication of that article and then shot upward in price. We do indeed see this, although this fund has not benefited from the recent strength in the market as many other assets. The fund's shares are down 4.56% since the date that the previous article was published, which is much worse than the 13.52% gain of the S&P 500 Index ( SP500 ):

For further details see: