The market yield will vary as the market price varies. As market price rises, yield falls. As market price falls, yield rises. A falling market price is often the cause of a high yield, for example DGS (Dividend Growth Split Corp) had a market price of $6.70 on March 29, 2018. The distribution is $1.20 annually, which makes the yield 17.91%. At the IPO value of $15, the yield was 8%. The price has fallen and the yield has risen.
Some split share Class A shares have high yields that many people would consider unsustainable, but is that what the fund is really paying out? No, that is the YOC (Yield on Capital) for that particular market price.
NAV Yield
The NAV Yield is what the fund is actually paying out relative to the asset value. If the NAV is $10 and the annual distribution is $1.20, the NAV yield is 12%. If an investor pays $7.50 for that share and receives $1.20 annually, that is a 16% yield. Only those who paid $7.50 will receive a yield of 16%. Those who paid $5 will receive 24%. Yet, the fund has only paid out $1.20 per share (12% of NAV) and each investor has only received $1.20 per share. The NAV yield remains constant in each case, but each investor has a different yield.
So the question really is not "Is 16% or 24% sustainable?". The question is "Is $1.20 per share sustainable?", or "Is the NAV yield of 12% sustainable?". That depends on the NAV. If the NAV is $10, then can the fund generate 12% on its assets to pay that distribution? If the NAV was $20, the fund would only have to generate 6% to pay the $1.20 per share. If the NAV was $15, it would need 8% to pay that distribution, which was the value of many Class A shares at IPO. As the NAV falls, it becomes more difficult to generate the required return.
It can be helpful to know what the NAV yield is to understand if the fund can continue paying the current distribution. How does the NAV yield compare to other similar funds? Is it trending up or down? The following table compares the NAV yield of some split share corporations. NAV Coverage is an indicator of the buffer above the minimum NAV (typically $15) in order for Class A shares to pay a dividend.
| Sorted by Nav Cvrg Descending | |||||
| Symbol | NAV | Price | NAV Yield | NAV Covrg | NAV Cvrg |
| PRM | $15.03 | $13.35 | 8.23% | $13,169,297 | 3.01 |
| ENS | $13.10 | $11.80 | 9.16% | $26,048,000 | 2.62 |
| BK | $11.02 | $10.99 | 11.54% | $67,307,555 | 2.20 |
| XTD | $5.93 | $6.18 | 10.12% | $20,082,894 | 1.59 |
| SBC | $12.55 | $12.94 | 9.56% | $59,803,185 | 1.51 |
| LBS | $7.53 | $7.90 | 15.94% | $102,514,787 | 1.51 |
| DFN | $7.31 | $8.54 | 17.56% | $103,872,735 | 1.46 |
| PIC.A | $5.90 | $6.50 | 13.78% | $63,662,127 | 1.39 |
| GDV | $10.14 | $10.24 | 11.83% | $18,566,500 | 1.35 |
| TXT.UN | $2.98 | $3.10 | 10.87% | $3,459,676 | 1.25 |
| FCS.UN | $4.73 | $4.29 | 15.22% | $786,752 | 1.18 |
| FTN | $5.90 | $8.54 | 25.57% | $36,922,770 | 1.18 |
| FFN | $5.89 | $6.86 | 20.07% | $16,627,450 | 1.18 |
| PDV | $5.22 | $6.14 | 13.78% | $262,517 | 1.04 |
| SBN | $6.54 | $5.50 | 6.92% | $39,150.12 | 1.00 |
| Under the Threshold | |||||
| DGS | $4.47 | $4.35 | 26.85% | -$14,740,113 | 0.97 |
| LCS | $3.95 | $4.02 | 22.78% | -$7,267,931 | 0.93 |
| DF | $4.26 | $4.00 | 31.41% | -$12,161,318 | 0.85 |
| LFE | $3.42 | $3.07 | 40.40% | -$23,431,852 | 0.68 |
| WFS.UN | $3.60 | $2.65 | 33.33% | -$14,755,800 | 0.52 |
| OSP | $1.82 | $2.26 | 78.95% | -$10,082,590 | 0.36 |
| YCM | $1.41 | $1.50 | 0.00% | -$5,931,976 | 0.14 |
| BSD.UN | $0.35 | $0.62 | 34.29% | -$7,706,617 | 0.07 |
| No Yield | |||||
| FTU | -$1.19 | $0.44 | 0.00% | -$17,382,702 | -0.24 |
| XMF | -$3.02 | $0.16 | 0.00% | -$25,248,476 | -0.53 |
Note: Since this table was created, FFN, FTN and SBN have moved into the Under the Threshold category.
The stocks at the bottom of the list which have a NAV coverage under a value of one (1) are not currently paying a distribution. The market yield is what it would be if it were paying a distribution. Notice that these stocks have the highest NAV yields except for the bottom three which have a negative NAV. Rather than deplete the funds completely, they have a clause in the prospectus that states no Class A shares will receive a distribution when the unit NAV is less than $15.
The highest NAV yielding stock which is currently making distributions is DGS which also has NAV coverage just above 1. With a NAV yield of over 20%, it would be wise for shareholders to watch this one to see which direction it moves in the coming months. FTN is in a little better shape, but with a NAV yield over 20%, this one may need closer monitoring as well.
The safest are those with a lower NAV yield and a higher NAV coverage.
One other thing to notice is that FCS.UN and SBN (as of March 29) were trading at a discount to NAV. This means they will actually get a higher yield based on share price than the fund is paying out based on NAV. This is an advantage to buying at a discount, but among split shares, is not too common. Most split shares tend to trade at premiums, lowering the actual yield received, because the price paid was higher than NAV.
How valuable is it to monitor NAV yield? One writer on closed end funds think it is very helpful. In regards to split share funds, it does make it easier to compare the funds on an even metric. Not all funds are based on the $15 threshold. The writer has suggested it could also be a warning signal, but is it any better than watching NAV itself? It may be a good warning signal, further research is needed to determine at which value one should take action.
No comments:
Post a Comment