As we near the end of 2024, I’ve got a detail or two to take care of related to my Portfolio. One is to make sure I post about my Portfolio transactions during the year.
About 2 weeks ago, I made a unique Portfolio move, and now I’m here to share the details.
After selling some Altria Group (MO) shares in late November, I still hadn’t found a place to reinvest those sale proceeds. However, the wait is over.
Replacing the dividend income from the MO sale was difficult given the stock’s high yield. While I don’t normally choose to recoup all the dividend income with just the sale proceeds (I often invest additional cash to help make up any income shortfall), in this instance my replacement investment was able to cover what I lost, and even add a bit more.
I didn’t do this by investing in a stock though, but rather a closed-end fund – the first one for my Portfolio.
Let’s get some details for this first-of-its-kind investment for my Portfolio.
DNP Select Income Fund (DNP)
DNP is a diversified closed-end fund (CEF), investing in a portfolio of equity and fixed-income securities of companies primarily in the public utilities industry.
The fund was started in 1987, which gives it one of the longest track records for a closed-end fund.
The fund’s primary investment objective is current income and long-term growth of income. Capital appreciation is a secondary objective.
DNP invests in a variety of sectors, including 1) electric, gas & water utilities (~64%), 2) oil & gas storage, transportation and production (~22%), and 3) communications (~13%).
Distributions are made monthly.
As I transition to using my dividends for living expenses sometime in 2025, I’ve been looking to generate additional income, as opposed to focusing solely on capital appreciation and dividend growth.
Selling a portion of my MO holdings and using those proceeds to buy DNP provided a small income boost, and helped diversify a portion of my Portfolio.
On 12/13/24, I initiated my DNP position by purchasing 500 shares at $9.27/share, for a total of $4,635.00. The stock yielded 8.41% at my purchase price, which is approaching 6 percentage points above my current Portfolio yield of 2.62%.
The purchase added $390.00 to my annual forward income. My first distribution payment from DNP will be in January.
As far as CEFs go, DNP has average net asset value (NAV) volatility for equity CEFs (Volatility is measured as the standard deviation of monthly NAV returns over the last decade.)
DNP does use a decent amount of leverage to help magnify investment gains. Its leverage ratio is fairly high for equity CEFs.
Currently, DNP has a yield that is more than 1 percentage point higher than its 5-year average of 7.46%. It also trades at a slight 2% premium to its NAV, however, this premium actually is a large discount relative to the 17% premium it usually has to its NAV. These suggest that DNP may currently be undervalued.
DNP has an average 10-year total return record for an equity CEF. It was easily outpacing the returns of other equity CEFs at the beginning of 2023, but returns have since lagged with the swift rise in interest rates in 2023.
The monthly returns of DNP over the past 10 years were not volatile compared to other equity CEFs. DNP has one of the lowest volatility ranks for returns you’ll find for an equity CEF. Meanwhile, the fund’s expense ratio of 1.02% is also rather low for an equity CEF.
DNP has been assigned a ‘Safe’ dividend safety score (70 out of 99) from Simply Safe Dividends.
DNP is currently my 8th smallest Portfolio holding. It’s smaller than my MO position, and just slightly bigger than my Walt Disney Co. (DIS) position.
At this point for new Portfolio holdings, I normally take a quick look at the dividend growth history dating back to 2000.
However, there’s no point in doing that with this CEF. While DNP has never lowered its distribution since inception, it hasn’t raised it since 1997 either.
Instead, DNP has churned out a consistent $0.065/share each month for more than 25 years.
Summary
With the MO sale proceeds from last month, and about $1,700 cash, I invested in my first closed-end fund (DNP).
Compared to my usual investments, I’m trading capital appreciation and dividend growth for higher current income. This income is becoming more important for me as I prepare for using my Portfolio income for living expenses in the coming year.
Since DNP is primarily made up of utility stocks, I’ll be positioning DNP as part of my Utility sector holdings.
I invested a total of $4,635 in DNP. My annual forward income increased by a hefty $390 thanks to the fund’s yield that’s north of 8.4%.
The addition of DNP brought the number of my Portfolio holdings to 59.
Do you have any CEFs as part of your portfolio? If so, which one(s) do you own, and for how long have you owned them? I look forward to your comments!