Richard Drury
The Gabelli Dividend & Income Trust (NYSE:GDV) is a closed-end fund (“CEF”) that invests in dividend paying equities and other income generating securities. Although the GDV fund pays an attractive 6.1% distribution yield, the fund generates below average total returns and experiences above peer volatility. I believe investors may be able to achieve better investment results by looking elsewhere.
Fund Overview
The Gabelli Dividend & Income Trust is a closed-end fund (“CEF”) that targets high total returns by focusing on dividend paying or other income producing securities. Under normal market conditions, at least 50% of the fund will be invested in dividend paying equities and 80% of the fund will be in dividend paying or other income generating securities.
The GDV CEF may invest up to 35% of its assets in international securities and up to 10% of the fund may be invested in non-investment grade (“junk”) bonds.
The GDV fund is managed by Mario Gabelli and a team of seasoned portfolio managers. Mr. Gabelli is the founder of Gabelli Asset Management and is a famous fund manager that was inducted to Barron’s ‘All Century Team’ in 2000.
The GDV fund is popular with investors, with over $2.2 billion in net common equity, and uses leverage from preferred shares to enhance returns. The fund has $350 million in preferred shares outstanding for effective leverage of ~14% (Figure 1). GDV charges a 1.3% expense ratio.
Figure 1 – GDV capital structure (GDV factsheet)
Portfolio Holdings
GDV’s website does not contain a lot of information about the fund’s holdings except the top 10 positions, which are shown in figure 2 and account for 17.6% of the portfolio as of December 29, 2022.
Figure 2 – GDV top 10 positions (gabelli.com)
From the factsheet, we can also glean that the fund’s top sector weights are in Financial Services (15.1%), Health Care (10.9%) and Food & Beverage (10.7%) (Figure 3).
Figure 3 – GDV top sector allocation (GDV factsheet)
Interestingly, the factsheet does not list Swedish Match AB (OTC:SWMAY) as the top holding, and instead has Deere & Co (DE) listed as #10. (author’s note: Swedish Match was acquired by Philip Morris in late 2022, so perhaps the position information on the website is erroneous?)
Morningstar, which has the fund’s portfolio has of September 30, 2022, shows the fund is 80% invested in domestic equities, 16% invested in international equities, and 1% invested in bonds (Figure 4).
Figure 4 – GDV asset allocation (morningstar.com)
Returns
The GDV fund has delivered respectable historical returns, with 3/5/10/15 Yr average annual returns of 8.5%/5.0%/8.8%/7.4% respectively to January 31, 2023 (Figure 5). However, investors should note that relative to the Large Cap Blend category on Morningstar, GDV’s long-term returns have been consistently ranked 3rd or 4th quartile.
Figure 5 – GDV historical returns (morningstar.com)
Furthermore, with regards to risk, the GDV fund has consistently generated higher volatility and equal or lower returns than the category (Figure 6).
Figure 6 – GDV has higher volatility and lower returns than peers (morningstar.com)
Distribution & Yield
The GDV fund pays a modestly high monthly distribution of $0.11 / share or 6.1% forward yield. The GDV fund also paid a $0.09 / share special distribution in 2022.
The GDV fund has historically funded its distribution through a combination of net investment income (“NII”), realized gains, and return of capital (“ROC”) (Figure 7).
Figure 7 – GDV has funded distribution through NII, realized gains, and ROC (GDV 2021 annual report)
Although GDV has utilized ROC to fund a portion of its distributions in the past, I do not believe the fund is an amortizing ‘return of principal’ fund. A ‘return of principal’ fund does not earn its distributions and instead, must frequently liquidate its NAV in order to pay its distribution.
A look at GDV’s long-term NAV progression shows that the fund’s NAV is generally in an uptrend over time, although the fund does periodically suffer steep drawdowns (Figure 8).
Figure 8 – GDV NAV in general uptrend (morningstar.com)
Fund Trades At A Perpetual Discount
It should also be mentioned that the GDV fund trades at a substantial discount, currently at 13% of NAV. The discount has ranged from a high of ~20% in 2008 to a low of ~5% in 2018 (Figure 9).
Figure 9 – GDV trades at a substantial discount (cefconnect.com)
GDV vs. DIVO vs. SPY
While GDV pays an attractive 6.1% distribution yield, its lower than peer returns and higher than average volatility suggest investors may be able to achieve better investment results elsewhere. For example, I recently reviewed the Amplify CWP Enhanced Dividend Income ETF (DIVO), which is a high yielding ETF based upon picking good stocks and selling call options for income.
Comparing GDV to DIVO and the SPDR S&P 500 Trust ETF (SPY) for the period January 2017 (DIVO’s inception date) to January 2023, we can see that GDV lags significantly behind both the DIVO and the SPY (Figure 10).
Figure 10 – GDV vs. DIVO and SPY (Author created with Portfolio Visualizer)
GDV has CAGR returns of 8.0% vs. DIVO at 12.1% and the SPY at 12.3%. GDV also has much higher volatility of 22.5% vs. DIVO at 14.3% and SPY at 17.1%. The result is GDV has much lower risk adjusted returns, with a Sharpe Ratio of only 0.40 vs. DIVO at 0.78 and SPY at 0.69.
In terms of distribution, the DIVO ETF pays a trailing 5.2% distribution yield, comparable to GDV’s 6.1% and far higher than SPY’s 1.6%.
Conclusion
The Gabelli Dividend & Income Trust is a CEF focused on investing in dividend paying equities and other income generating securities. The GDV fund pays a generous monthly distribution, with a forward yield of 6.1%. The distribution appears to be supported by the fund’s long-term returns.
However, with below peer total returns and higher than peer volatility, I believe investors may be able to achieve better investment results by looking elsewhere.
Be the first to comment