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CHI opinions (long term CEF for dividend income)
Old 06-28-2019, 01:59 PM   #1
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CHI opinions (long term CEF for dividend income)

Over the next 10 years, I plan to start transitioning some of my growth funds into dividends funds.

CEFs recently got my attention, one specifically is CHI.
Calamos Convertible Opportunities and Income Fund Dividend

For reference, examples of my other considerations are:
(also considering KBWY, which is not a CEF)

My specific question about CHI is this:

Over the past 15 years, its payout has somewhat declined. There was a fairly brief time that it rose from 9 to 12 to 15 (cents), then "stable" (as far as anything is stable) for a long time at 9.5 (~10 years), then more recently down to 8 (cents).

My question is, under what condition might CHI increase its payout in the future? Or is a CEF like this prone to gradually declining payout over time? I've read how some CEFs are going since the 1920s, and they do sometimes merge with other funds. Also, CHI in particular uses some amount of leverage. So, there is risk, and if I have to consider a trend: CHI's payout has been in decline (but fairly slowly).

The balance I'll have to work with should be between $1M-$2M, so living off like a 2% yield might not be too realistic. But yields in the 4-6% range may be viable (as it would be supplemented with other incomes, like pension).

CHI in particular at PortfolioVisualizer only goes back to 2016 (unfortunate, since it's been around since 2002); not sure if there is an alternative to substitute to get a longer historical perspective.

But as an example, I did the following model: $1M, no dividend re-investment (since intent is to live off the dividends), between a broad index vs pure dividend picks vs mixed. The key is looking at the Annual Returns summary.

Thoughts on CHI, as maybe a 15% portion of an eventual dividend oriented portfolio for living off said dividends?

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Old 06-28-2019, 02:52 PM   #2
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CHI in market downturns is a tremendous under-performer as convertible stock losses a lot more of it's value in a downturn and this fund invests in convertible bonds like Tesla that derive most of their value from stock speculation as a psuedo-option. Since 2016 it has been in line with the S&P500 but it was ahead by about 20% when it lost 34% of it's value in the 4th quarter of 2018.

This is a specialty fund with a .8% management fee that has averaged about 9% returns to NAV per year over 17 years of existence. As it pays a 9-10 percent payout it is difficult to maintain that when you have years with such dramatic drops.

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Old 06-28-2019, 03:22 PM   #3
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I like JPC, JPI, and PCI for income. Jmho
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Old 06-28-2019, 06:17 PM   #4
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CHI is a fine CEF if you want to own convertibles. I've owned it before.

In general I think CEFs are a good way to boost your income, but only a tiny few are going to raise their dividends given current interest rates. You will probably see a long slow decline in the income every year.

Two CEFs with a good track record of increasing NAV and payouts are UTG and HTD. Both invest primarily in utility stocks, which have had a good run, and may explain why the two CEFs have done well.

If you are looking for income you could also consider adding some BDCs (etf BIZD), mortgage REITs (etf REM), and MLPs (etf MLPA). For CEFs you could consider adding an ETF that owns many CEFs like PCEF, YYY, and XMPT. Also a CEF along the same lines is FOF.

IMHO, now may not be a great time to start buying into any of these. If we do get a recession, all of these will get clobbered as they are all levered up.

P.S. My taxable account is 100% is Vanguard's High Div Yield index. I moved to dividend growth as I now have enough money to invest with that its a better strategy for generating income. Currently have $430k in it and assuming a current 3.10% yield that is $13,330 which should grow around 7% per year. By my guesstimate I need $18k per year in dividends to start living as an expat. With $1,500 a month you can live a nice comfortable life in most of the world.
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Old 06-28-2019, 06:52 PM   #5
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CHI -- cut dividend in October. I would look at DNP-- but not now. It is at an all time high (or near again). But on a pull back might be nice. It has a fixed distribution plan. I quit investing distributions at these prices. DNP is based on utilities instead of bonds.

These can be exciting if you think of them as buy and forget.
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Old 06-28-2019, 08:45 PM   #6
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I would not be willing to put 15% of my portfolio in CHI or most any single closed end fund (or BDC or REIT for that matter) as the these things tend to be more opaque than most common stocks. I would look for a basket of common stocks, bonds, reits, CEF, etc., regardless of whether you chose to buy individual names or some index.

I may over generalize but most closed end funds are geared for income rather than price appreciation, which is fine. But sometimes this means their distribution (notice I did not use the term dividend) consists of return of capital (ROC) instead of true income. If the fund's trading price or net asset value (NAV) does not drop appreciably then receiving ROC is fine but it can complicate the tracking of your cost basis and overall performance. An example of this is the Aberdeen Asia-Pacific Income Fund (ticker symbol FAX) which has paid out $0.035/month for many years including through the '09 financial crisis but in recent years a larger and larger chunk was being paid out as ROC which caused its value to drop. This year they dropped the payout to $0.0275/month to deal with the situation.

As for CHI in particular many pundits are warning about the historical level of debt around the world, especially about high yield as the market expansion has been going on for a long time and the chance of a significant correction increases each passing month even if that is unlikely in the near term.
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Old 06-29-2019, 12:43 AM   #7
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Originally Posted by triangle View Post
I would not be willing to put 15% of my portfolio in CHI or most any single closed end fund (or BDC or REIT for that matter)
True, I should I have said ~7%. I meant like this:

50% broad index funds as usual
(e.g. ITOT, blended/growth, maybe 2-3 picks of this nature)
50% some combination of dividend oriented CEF/ETF
(^ I was implying a spread of 4-6 income/dividend oriented CEF/ETF in this second category; so 10-15% in here, or ~7% overall)

Discussing allocations I think need always context of the investors age and plans. In this case, it's 5-10 year run up towards having enough money to consider a sustained retirement; but we do plan to stay States side and have a daughter to consider (house alone is $5K/yr taxes -- $1500/mo would be tight for us, my goal is more along $4K/mo).

Thanks all for the feedback. I think my take away is that CHI isn't horrible. As long as I do believe in the market overall, it shouldn't dwindle from 8.5 to something like 5, 3, 1, kaput! Just don't expect it to rise back up to 12-15 (cents) anytime soon either.
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Old 06-30-2019, 03:17 AM   #8
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I ran through many of these various suggestions tonight. Not trying to make any specific recommendation, but wanted to summarize a few things:

That FOF does look pretty good right now (and HTD to a slightly lesser extent).

I realize now KBWY is only 30 holdings (but each of those holding baskets has a lot). RNP or PCI may be good alternatives to KBWY, just by having more expressed holdings.

PCEF by itself also looks good, although Fidelity suggested an alternative: PSMG, which also looks fantastic (only fault is it having under 5 year track record).

Conversely, my examinations steer me away from: BME, JPC, COMT, AOA. They might be fine currently, but it seems there may have been some hiccup in their past.

This leaves me with about 12 picks that look promising to me (including CHI).

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