NAV is an acronym for Net Asset Value. It is the assets of a fund less the liabilities. The assets are the stocks the fund holds and cash on hand. Most people simplify it and consider it to be the value of the stocks the fund is holding. Split Share Corporations are generally considered to be closed end funds, which means they don't create and redeem shares on a daily basis like mutual funds do. They generally only create shares when an Offering is conducted and only redeem shares at set times during the year. This holds the number of shares fairly constant. Since the shares are available to trade daily on the market, there is almost always a gap between the NAV and the market or share price. This makes for some interesting situations to arise that do not occur with open ended mutual funds and ETFs.
Market Yield
The market yield will vary as the market price varies. As market price rises, yield falls. As market price falls, yield rises. This 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%. Some split share Class A shares have high yields that many people would consider unsustainable, but is that what the fund really paying out? No, that is the YOC (Yield on Capital) for that particular share 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.
So the question really is not "Is 16% 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?
Premiums
When the market price is higher than the NAV, a buyer is paying a premium to NAV. If the NAV is $10 and the market price is $10.10, it is suggested this is buying $1 worth of stocks for $1.10. Looked at as straight math, that may be correct, but there may be unrealized value in the underlying stocks, there may be management expertise or there may be other factors that make it worth paying a premium for those shares. The main reason suggested by some writers is the yield. Since closed end funds are a small and not very well covered category, they are purchased mainly by retail investors and they may not fully understand all the moving parts, are focused on the yield and are simply looking for steady distributions.
Discounts
When the market price is lower than the NAV, a buyer is getting a discount on NAV. If the NAV is $10 and the market price is $9.90, this is considered to be buying $10 worth of stocks for $9.90. The market may be factoring in the management and other fees, or there may have been a distribution cut or there may have been a suspension of distributions.
Benefits and Drawbacks
One downside of paying a premium is the market price could fall towards the NAV. Those who track total return may find that it is falling at a smiliar pace as one is collecting distributions. For example, if the market price falls $1.00 in a year and $1.20 worth of distributions are collected, there may have been a 10% yield collected, but now the asset is market priced 10% less than last year so the investor is not much further ahead. On the other hand, an income investor may not care about market price, as long as the distributions continue.
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