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This Fund Carries a 10.6%
Yield and Sells at a Discount |
Published: November 5,
2007
The Nicholas-Applegate Convertible
& Income Fund's (NYSE: NCV, $14.06) $1.5 billion portfolio is
divvied up between convertible bonds (54%), high-yield bonds (44%), and
cash (2%). An average credit quality of BB- puts the portfolio one rung
below investment grade, although roughly a third of its assets rank as
investment grade.
Top holdings include a $34 million stake in a high-quality, Triple
A-rated convertible bond issued by smokeless tobacco and wine maker UST
(NYSE: UST), a $25 million position in the convertible preferred shares
of power generator NRG Energy (NYSE: NRG), and another $25 million
holding in an investment-grade convertible of Canadian insurance giant
Fortis (TSX: FTS-UN.TO).
The portfolio carries an average yield of 9%, and the fund juices
returns by leveraging (borrowing against) about a third of its assets by
issuing short-term preferred shares.
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NCV has paid a regular dividend of
$0.125 per share every month since inception in 2003. It also
dishes up a year-end capital gains payout. With a total payment
of $1.50 over the past 12 months, the fund offers a yield of
10.6%.
A management fee of 1.27% of the fund's asset value trims your
total returns. Most of last year's dividend was taxed as
ordinary income, but about 19% qualified for the reduced
dividend tax rate and 12% as long-term capital gains, taxable at
the 15% rate.
Allianz Global Investors fund managers maintain a dividend
reinvestment program, and you can contact them at
1-800-331-1710.
NCV has produced total returns (including distributions) of
around +12% annually over the past three years, beating more
than a third of the funds in its category. So far this year, the
portfolio has grown a healthy +9% with reinvested dividends. But
investors grew wary of high-yield investments like NCV in the
aftermath of this summer's subprime mortgage crisis. As a
result, the fund's market value returns with reinvested
dividends are far lower at -5% year-to-date.
The shares were trading at a premium for a year and a half --
until they nose-dived this summer amid the subprime mortgage
meltdown. They can now be scooped up at a -4.3% discount, giving
you a dollar's worth of assets for just 96 cents.
Action To Take ---> Given
its growing portfolio, the fund should continue providing steady
double-digit returns over the long term. The discounted share
price may provide an opportune entry point for an investor
seeking a steady income stream and willing to tolerate some
volatility in the share price.
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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