This article appeared in the Carnival of Personal Finance #132.
Recently Stock Gumshoe posted a fascinating article Dividend Doubling Dynamos: 3D and the 61 Day Strategy for 50% More Dividends! discussing a strategy that allows you maximize annual dividend income while taking into account the effect it will have on your taxes. The dividend returns (10+%) piqued my interest, so I have spent some time looking at this strategy by focusing on Alpine’s Total Dynamic Dividend Fund (AOD), a closed-end fund that utilizes this strategy.
The Alpine Total Dynamic Dividend Fund attempts to optimize both dividend income and long-term growth of capital. This is a very diverse and flexible fund. It employs a global, multi-cap, multi-sector, and multi-style investment approach. The fund combines four research-driven investment strategies – Growth, Value, Special Dividends, and Dividend Capture Rotation. Each is discussed below:
Strategy I: Growth Dividend Payers
The objective here is for capital appreciation and rising dividend income. This is your traditional dividend investing strategy – identify companies with lower, but still attractive current dividend yields, that have good earnings growth potential. The focus here is on capital appreciation potential and consistently growing dividends.
Strategy II: Value Dividend Opportunities
Strategy II’s objective is for current high dividend income and capital appreciation. This portion of the fund focuses on investments with higher than average dividend yields. The focus here is on under-valued or mispriced equity opportunities, turnaround opportunities, restructuring or major corporate action expected to add value and companies with low valuations relative to their historical averages. This is not much different than when I add some higher yield slightly more risky stocks in my portfolio. The next two strategies are where the Alpine Total Dynamic Dividend Fund differentiates itself.
Strategy III: Special Dividend Research
The fund’s management team seeks to identify and capture special dividends paid by companies. Special dividend situations occur when companies return large cash balances to shareholders as one-time dividend payments due to a restructuring or recent strong operating performance.
Strategy IV: Paired Rotation Strategy
The Fund’s paired rotation strategy pairs similar stocks and captures multiple dividends per year versus four quarterly dividends. Put another way, while most dividend stocks pay four dividends per year, Alpine’s paired rotation strategy seeks to capture more dividend payments with the same investment capital by “rotating” between securities with similar characteristics throughout the year. Generally, the fund attempts to capture six to eight dividends per year, instead of four, on the same invested capital. This will obviously pump up the investments return. It is important to note that using this strategy will will expose the fund to increased trading costs and potential for capital loss or gain, particularly in the event of significant short-term price movements of stocks subject to dividend capture trading.
I can attest that this strategy actually works. Several years ago I was employing it in my IRA with favorable results. However, I discontinued using it due to the enormous amount of time it took to manage that many buys and sells. Also, to effectively execute this strategy you need to trade large blocks to dilute the trading costs.
The Alpine Total Dynamic Dividend Fund is managed by Jill Evans. Based on the limited information I could find on her, she seems to be well-respected. Below is a comment I found about her in the Motley Fool Caps user comment section:
Alpine Funds, who brought us the star mutual fund ADVDX, is the company behind AOD and I believe AOD is going to become their next star. When it comes to income investing, Jill Evans who manages this closed-end fund is one of the best out there. She utilizes a dividend capture strategy in a third of the portfolio in which she works to rotate the portfolio in such a way that the dividends qualify for the 15% tax bracket and that she can pick up 6 dividends a year. The result is a fund that will yield about 10% per year, which is an income investor’s dream! I said earlier that I believe AOD is Alpine’s next star, and the reason for that is it has advantages over their other well-known funds. Being a closed-end fund, inflows and outflows are not a worry for Ms. Evans, she knows what she has to work with and can count on that. This is Alpine’s preferred method of investing, and I think it fits them well. Additionally, AOD has an advantage over AGD because it was formed to fix some problems in AGD. AGD is limited in how much of the portfolio can be invested internationally which Ms. Evans realized limited the fund. AOD doesn’t have this limitation. It gives Ms. Evans and Alpine all the tools they need to do what they do better than anyone else…create a high yield. I own the fund and highly recommend it.
While perusing the company’s prospectus, I noticed it was allowed to invest in Master Limited Partnerships (MLPs). I am not a fan of MLPs, primarily due to the tax hassles associated with waiting on a final K-1 from the company and wading through a mountain of tax forms to ensure everything is properly accounted for. I made a quick call to the company to ask about this issue and learned that the fund was not currently invested in MLPs and if it were to do so, the closed-end fund would deal with the K-1 nightmare and issue me a simple 1099. The person I talked to was very knowledgeable and fully understood my concerns and was able to intelligently address them.
The closed end-fund is relatively new. It was formed in January 2007 and has paid a monthly dividend of $0.18 per month since May 2007. Recently, it declared an $0.18 dividend for the next three months. It will be interesting to see if and how much the fund raises its dividend in the future.
Full disclosure: The fund intrigued me enough that I purchased a small position in it. This will force me to continue tracking it.
What do you think about the concept of dividend capture?