PHD - PHD And VVR: Two 12% Yielders Raising Dividends At Discounts

2023-04-16 09:15:00 ET

Summary

• PHD has raised its payouts six times in the past year. VVR has raised it three times, plus a special dividend.
• They both yield over 12%, and pay monthly.
• They're also selling at 8% to 12% discounts.

Looking for a way to benefit from rising rates? Pioneer Floating Rate Fund ( PHD ) and Invesco Senior Income Trust ( VVR ) are two closed-end funds which we first covered in late November 2022.

Since then, they've both had better total returns than the S&P 500 - VVR has the best return, at ~5%, while PHD returned 4.45%, vs. ~3% for the S&P:

Fund Profiles:

Pioneer Floating Rate Fund is a CEF which seeks a high level of current income by investing primarily in floating-rate loans. It also seeks capital preservation as a secondary objective to the extent consistent with its primary goal.

Invesco Senior Income Trust is a CEF whose investment objective is to provide a high level of current income, consistent with preservation of capital. The fund achieves its objective via investing primarily in floating or variable senior loans of issuers which operate in a variety of industries and geographic regions.

PHD is much smaller than VVR, with $183M in assets, vs. $927M for VVR, which also has much higher average daily volume of 938K, vs. just 75K for PHD.VVR holds 542 positions, vs. 285 for PHD.

Both funds use 30%-plus leverage, with VVR using slightly more than PHD. PHD's Expense ratio is 2.45%, vs. 1.65% for VVR. PHD has a shorter average maturity of 2.45%, vs. 4.16% for VVR. VVR has been around six years longer, IPO'ing in 1998, while PHD debuted in 2004:

Dividends:

PHD has raised its monthly distributions six times over the past year - going from $.0575 to $.09:

VVR has raised its payout three times since September '22, and also paid a special dividend in December '22:

At their 4/13/23 intraday prices, PHD yielded 12.26%, while VVR yielded 12.51%. PHD declared a 4/18/23 ex-dividend date, with a 4/28/23 payout date, while VVR's next monthly ex-dividend date should be ~5/12/23, with a ~5/31/23 payout date:

PHD covered its by 102.41% for the 12 months ending 11/30/22, with the coverage coming from Net Investment Income, NII. Its NII coverage was 111%, similar to its coverage for the five months ending 5/31/22.

VVR had a shortfall for the 12 months ending 2/28/23, with NII only covering 82.34% of its distributions. Realized gains were -$4.34M.

VVR's NII coverage for the six-month period ending 8/31/22 was 112.15%, while the last six months ending 2/28/23, NII was only ~$13.5M, vs. ~$24.7M in distributions:

Holdings:

PHD holds 88.6% in unrated securities, with 5.65% in B-rated and 2.63% in BB-rated holdings:

VVR holds 10.7% in BB-rated, 28.73%, and 52.83% in unrated holdings:

PHD's top 10 holdings comprise 10.17% of its portfolio, comprised of term loans.

VVR's top-10 holdings comprised ~16% of its portfolio, and included debt from such well-known names as PetSmart and United Airlines, as of 12/31/22. Its top five sectors were services, 14.73%, gaming/leisure, at 8.94%, aerospace, at 8.6%, healthcare, at 7.48%, and technology, at 6.60%.

Performance:

Both funds have lagged the S&P in price performance over the past month, six-month, one-year, and year to date periods. However, VVR has the best ~total one-year return, at 2.92%, vs. negative returns for PHD and the S&P.

PHD outperformed the Morningstar US CEF Senior Loans category in 2015, 2019, and 2021:

VVR outperformed the Morningstar US CEF Senior Loans category in 2018-2019 and 2022, while outperforming on a NAV basis in 2021:

VVR has the edge over PHD in NAV and Price returns over the past one-, three-, five-, and 10-year periods, as of 3/31/23:

Valuations:

Buying CEFs a discount to NAV that are deeper than their historical averages can be a useful strategy, due to mean reversion.

PHD's ~-12% premium to NAV is a bit deeper than its 1-year -11.22% premium, and much deeper than its -6.86% 3-year, and -8.7% 5-year premiums.

As VVR has had better NAV returns than PHD, it's not surprising that its -7.88% premium is not as deep as its one-, three-, and five-year average premiums to NAV:

Parting Thoughts:

If the Fed continues its rate hikes at least in 2023, these floating rate funds could be a good place to stash some cash for the near term.

We favor PHD based upon its current deeper discount and distribution coverage. However, keep an eye on VVR - if there's a market pullback, you may be able to buy it at a deeper than historic discount.

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

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