Published:
January 5, 2009
I first started looking at First
Trust DJ Global Select Dividend (NYSE: FGD, $14.49)
in the
August 2008. The fund tracks the performance
of the Dow Jones Global Select Dividend Index -- an income-oriented
benchmark reserved for some of the world's most elite dividend
payers.
The index starts by taking every stock in the world's 24 largest
developed markets and then lopping off all but those with the
strongest yields. But it takes more than just generous distributions
to enter this exclusive society.
As we've been reminded lately, a dividend is only as secure as the
firm that stands behind it. So all candidates are put through
another level of screening to ensure that payments are backed by
adequate earnings. Specifically, all members must maintain payout
ratios below 80% (60% for U.S. and European companies) -- a level
suggesting ample cash flows to safely cover dividend obligations
with room to spare.
Finally, a company's current dividend payments must be above its
five-year average to qualify for inclusion, so the fund favors firms
boosting distributions rather than lowering them.
With these safety valves in place and thousands of stocks to choose
from, FGD only takes the top 100. Shareholders will have a stake in
reliable U.S. firms like AT&T (NYSE: T), but the vast majority of
assets (80%) are invested overseas, primarily in Australia and
Europe. Top holdings include France Telecom, Hong Kong Electric, and
Macquarie Infrastructure.
Unfortunately, rich dividend yields haven't been enough to keep FGD
from sliding with the rest of the global markets. In fact, the
shares have lost more than half their value so far this year. But
this sell-off has only sweetened an already juicy yield considering
the fund's holdings all have margins of safety that make them less
susceptible to dividend reductions.
Of course, no fund is immune, as withering profits have forced many
companies to axe their payments during this economic slump to
preserve capital. Not surprisingly, most of this damage has been
done in the financial sector. According to Standard & Poor's,
dividend reductions pulled $23 billion out of investors' pockets
last quarter, and financial stocks accounted for roughly $21 billion
of that.
So it stands to reason that the financial sector (which once soaked
up almost half of FGD's assets) now accounts for just 38%. But the
index will be reconstituted later this month, and holdings that have
fallen by the wayside will soon be jettisoned and replaced.
In the meantime, the portfolio was already generating net investment
income of $0.063 for every dollar in assets as of September 30th.
With most portfolio holdings dishing out the same dividend payments
that they were a few months ago, that income to assets ratio is
likely higher now following this pullback.
In fact, distributions of $1.33 per share over the last year now add
up to a robust yield of 9.2%. And that rate stands on its own
without the aid of portfolio leverage or options writing.
I liked FGD
back in August, but I love the fund now after this overdone
sell-off -- with its average portfolio holding sliding below book value and
trading at just four times cash flows.
Nathan Slaughter
Editor
The ETF Authority
About
The ETF Authority
The mission of The ETF Authority
is to help our readers identify today's most profitable ETFs and closed-end
funds. (Learn
More)
About Nathan Slaughter
Nathan Slaughter has developed a long and successful track
record over the years by investing in both exchange-traded funds (ETFs) and
deeply discounted value securities. When it comes to ETFs, Nathan has
created a proprietary ranking system that helps him zero in on today's most
promising funds.
Nathan's previous experience includes a long tenure at
AXA/Equitable Advisors, where he provided comprehensive investment advisory
services to small businesses and high net-worth clients. He also honed his
research skills at Morgan Keegan, where he performed asset allocation,
retirement planning, and consultative portfolio management services.
Several years ago Nathan switched gears and decided to devote
his time exclusively to financial analysis and writing. He has since published
hundreds of articles for a variety of prominent online and print publications,
and he now writes exclusively for StreetAuthority.com.
Nathan's educational background includes NASD series 6, 7, 63,
& 65 certifications, as well as a degree in Finance/Investment Management.
He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley.
To learn more about Nathan Slaughter's premium investing newsletter -- The
ETF Authority -- please
visit
this link.
|
