NAV Erosion vs Dividends

[marko]

Intrigued solely by the concept, I decided to violate my main investing rules (don't be greedy, don't buy something you don't fully understand) and threw some "fun money" ($40k) into a couple of YieldMax call option funds.

This was six months ago when the March market downturn allowed me to buy them at or near their lows at the time. (I'm not good, just lucky)

But I keep reading about cautions of NAV erosion. I do understand how that could happen.

Over the past six months my NAV average is down about 4% but I've received about 42% in dividends TD. Crazy.

So here's my theoretical question: If the NAV eventually dropped down from let's say $10 to $1.5 but I kept receiving 20%, 30% or 40% in dividends over 3, 5 or 7 years, why would I care?

As noted, this is money that if I got completely wiped out, I wouldn't be happy but wouldn't lose any sleep over, chaulking it up to a lesson learned. As it is, I'm poised to get my initial investment back via dividends in about 7 more months.

 

[Koolau]

$40K = Fun Money?

 

[Sunset]

In your case, no problem.
I think the issue is more in the case of person getting 12% dividend, and the stock drops 7% in value. Some folks think it's totally fine, but really they are just getting a Net of 5% which is not great.

 

[COcheesehead]

And that is why some people are income investors. If the income outpaces the erosion, you’re good.
Having owned some Yieldmax products in the past I can also say that sometimes the erosion eats the dividend.

 

[Koolau]

And that is why some people are income investors. If the income outpaces the erosion, you’re good.
Having owned some Yieldmax products in the past I can also say that sometimes the erosion eats the dividend.

My thinking is that successful income investing requires diligent "choosing" (picking) of stocks with not only good dividends, but with dividend momentum with OUT significant stock-value downside. IOW you have to "w*rk" at it.

Several of our (especially new) members have shown themselves to be particularly good at this approach. I applaud them and have been tempted to learn from them.

Having said that, I've recognized my limitations (lazy, couch potato type) and have decided to stick with index investing which has served me well.

BUT I've occasionally cast an envious eye on those monthly income numbers!

 

[gauss]

I invested in a fund based on call-put option "collars" on the Nasdaq 100 (formerly NUSI now QQQH). I think it distributed on average 9% of the Nasdaq 100 value or so paid monthly. Many of the payouts were classified as a "return of capital" most years for tax purposes -- which can be a good thing from a tax perspective.

The problem is when less sophisticated investors think that the 7% is true investment income and don't realize it is their own money coming back to them.

There is a form on their web site that they are required to file, I think every month, that discloses how much of the monthly payout is a return of capital. They are referred to as 19a-1 notices and here is a current example. From just this single notice, it appears the current return is still 100% return of capital despite the raging stock market (hmm.)

So for sophisticated guys, this may be a worthy trade-off worth making. For someone less sophisticated who doesn't realize that their original investment is being consumed, it would be more problematic.

If the drawdown via the payouts is "significant enough" compared to the underlying growth, then the dividends will eventually decrease in value or be eliminated completely.
You will need to do your own ROI calculation combined with your assumptions of growth in the underlying asset to determine if it is a good deal to you.

Another way to view this is that a total return investor would tend to be ok with the concept, but a true income investor may want to avoid these. This is based on total return investing typically assumes a return of capital during the lifetime of the investor.

One final comment, I believe that the influx of new investor dollars can and is used to pay the existing investors distributions, without the fund selling assets (which would be a taxable event). Although totally legal and regulated in this case, it does seem to have some of the aspects of an illegal Ponzi scheme.

-gauss

 

[COcheesehead]

My thinking is that successful income investing requires diligent "choosing" (picking) of stocks with not only good dividends, but with dividend momentum with OUT significant stock-value downside. IOW you have to "w*rk" at it.

Several of our (especially new) members have shown themselves to be particularly good at this approach. I applaud them and have been tempted to learn from them.

Having said that, I've recognized my limitations (lazy, couch potato type) and have decided to stick with index investing which has served me well.

BUT I've occasionally cast an envious eye on those monthly income numbers!

It doesn’t have to be a stock. It could be an options play like the OP or CEFs or REITs or other income generating assets.

 

[Koolau]

It doesn’t have to be a stock. It could be an options play like the OP or CEFs or REITs or other income generating assets.

Yes. Right, I've been learning about stuff I had ignored in the past. Good reminder.

 

[TheWizard]

I think most of those high yield CEF/ETF dividends are Ordinary Income, not Qualified.
So many people won't hold those in their taxable account, only in an IRA of either type.

Additionally, it still makes sense to monitor the Total Return of an investment like this, not only for the current year, but for a few years preceding...

 

[marko]

$40K = Fun Money?

Well, the definition "fun money" has changed over the years!

A combination of record high portfolio numbers, 20 years or less of time left to spend it and the fast recovery from the 2008 debacle keeps moving that risk tolerance further and further out!

 

[Koolau]

Well, the definition "fun money" has changed over the years!

A combination of record high portfolio numbers, 20 years or less of time left to spend it and the fast recovery from the 2008 debacle keeps moving that risk tolerance further and further out!

I understand.

I would say we spend just about the same (fun money amount) in order to live our dream in the Islands (with one foot still in the midwest). YMMV

 

[marko]

The problem is when less sophisticated investors think that the 7% is true investment income and don't realize it is their own money coming back to them.

There is a form on their web site that they are required to file, I think every month, that discloses how much of the monthly payout is a return of capital. They are referred to as 19a-1 notices and here is a current example. From just this single notice, it appears the current return is still 100% return of capital despite the raging stock market

Yes, I've been keeping track of their monthly ROC declarations. The thing is, from what I've gleaned, when your 1099 comes, the ROC (box 3?) is considerably lower, if there is one at all. Not sure how that works but I won't know until February on that.

 

[gauss]

^ Unfortunately I held my NUSI/QQQH in a retirement account, so I never was able to see the 1099-DIV breakdown of the income.

I do know that some fund companies will place accounting spreadsheets on their web sites to break this down in aggregate -- I suspect this is the information that brokerages use to construct the retail 1099-DIVS that they issue.

 

[Brat]

Check out Vicktoiya Media on YouTube. Her focus is dividend ETF and has discussed NAV errosion.

 

[marko]

^ Unfortunately I held my NUSI/QQQH in a retirement account, so I never was able to see the 1099-DIV breakdown of the income.

I do know that some fund companies will place accounting spreadsheets on their web sites to break this down in aggregate -- I suspect this is the information that brokerages use to construct the retail 1099-DIVS that they issue.

I've downloaded the spreadsheets from 2024 on the funds that I bought. Not sure what the 2024 1099 said but the ROC on the spreadsheet wasn't even close to the monthly announced ROC this year to date. Again, won't know until the forms arrive in February.

 

[Route246]

Well, the definition "fun money" has changed over the years!

A combination of record high portfolio numbers, 20 years or less of time left to spend it and the fast recovery from the 2008 debacle keeps moving that risk tolerance further and further out!

A friend's father calls this sweat money. It is money and he cares dearly about it but he is willing to put it out there at risk if he feels the opportunity is worth the risk.

 

[gauss]

Yes, I've been keeping track of their monthly ROC declarations. The thing is, from what I've gleaned, when your 1099 comes, the ROC (box 3?) is considerably lower, if there is one at all. Not sure how that works but I won't know until February on that.

One possible explanation is that the fund did not sell any underlying investments until the end of the year and then they sold at a gain.

I believe that If that were to occur, the only ROC that would show in the end on the 1099-DIV would be those distributions to shareholder not explained by the funds underlying capital gains / dividend & interest income received (ie the true investment income of the fund).

If you were to receive a 1099-DIV with no entry in box 3 (ROC / nondividend distributions), but also no entries in any of the other "income" categories, then that would indeed be interesting. Keep in mind I'm not an expert in this, but have tried to understand it a bit along the way.

-gauss

 

[marko]

One possible explanation is that the fund did not sell any underlying investments until the end of the year and then they sold at a gain.

-gauss

From the website on their weekly announcement:

The ROC percentage indicates how much the distribution reflects an investor's initial investment. The figures shown for each Fund in the table above are estimates and may later be determined to be taxable net investment income, short-term gains, long-term gains (to the extent permitted by law), or return of capital. Actual amounts and sources for tax reporting will depend upon the Fund's investment activities during the remainder of the fiscal year and may be subject to changes based on tax regulations. Your broker will send you a Form 1099-DIV for the calendar year to tell you how to report these distributions for federal income tax purposes

 

[gauss]

^ Thanks for the confirmation.

-gauss

 

[Flieger]

You may have hit the sweet spot for your entry. I didn't on a couple of mine although TR was positive, not what I was hoping.

Flieger

 

[marko]

You may have hit the sweet spot for your entry. I didn't on a couple of mine although TR was positive, not what I was hoping.

Flieger

Totally by accident on this one, but my experience on new funds and stocks is to give it a year or so to settle in.

IIRC, you had TSLY. My nav is up 6.5% on it.

 

[Flieger]

Totally by accident on this one, but my experience on new funds and stocks is to give it a year or so to settle in.

IIRC, you had TSLY. My nav is up 6.5% on it.

Yeah. It has taken recent positive turn. Hope it stays there for you!

Flieger

 

[floss187]

Buying these, i treat them as an annuity in my head.
i purchase it, that money is gone, then i get paid weekly/monthly 'for life'.
7-10 month return on investment in many cases. pull out initial, use house money if you want or let it ride for life.

My experience has been - and i own most of them in small quantities - the big chasers do well for a bit and then crash. you'll have a far better experience if you play with the smaller payers in the long run.

NFLY has been the long term winner for me.

 

[marko]

Buying these, i treat them as an annuity in my head.
i purchase it, that money is gone, then i get paid weekly/monthly 'for life'.
7-10 month return on investment in many cases. pull out initial, use house money if you want or let it ride for life.

My experience has been - and i own most of them in small quantities - the big chasers do well for a bit and then crash. you'll have a far better experience if you play with the smaller payers in the long run.

NFLY has been the long term winner for me.

Thanks. It does seem that the high flyers have come down to earth and to reality. No more 80%, but there's nothing wrong with 35% is there?

 

[pb4uski]

Intrigued solely by the concept, I decided to violate my main investing rules (don't be greedy, don't buy something you don't fully understand) and threw some "fun money" ($40k) into a couple of YieldMax call option funds.

This was six months ago when the March market downturn allowed me to buy them at or near their lows at the time. (I'm not good, just lucky)

But I keep reading about cautions of NAV erosion. I do understand how that could happen.

Over the past six months my NAV average is down about 4% but I've received about 42% in dividends TD. Crazy.

So here's my theoretical question: If the NAV eventually dropped down from let's say $10 to $1.5 but I kept receiving 20%, 30% or 40% in dividends over 3, 5 or 7 years, why would I care?

As noted, this is money that if I got completely wiped out, I wouldn't be happy but wouldn't lose any sleep over, chaulking it up to a lesson learned. As it is, I'm poised to get my initial investment back via dividends in about 7 more months.

Not sure if you would care. It's all just cash flows at the end of the day. It's a fund and exchanged at NAV and not an ETF exchanged at market values?