Question:
Back in the day, Gene suggested Duff and Phelps, now DNP Select Income Fund (NYSE: DNP), to my father-in-law. He put about $100,000 into it, and has loved it ever since. Today, he’s 88 years old and happily takes his dividend every month. DNP represents about one third of his portfolio. Do you still like DNP for him? He sure does! DNP has also given him an option to buy $12K worth of additional shares at a slight discount. He wants to exercise this option ASAP. What does Gene think?
Answer:
DNP Select Income Fund has a 7.8% dividend yield, of which 70% comes from dividend-paying equities. The rest of the portfolio consists of bonds. The fund carries a 1.95% expense ratio. The fund also uses 33% leverage to buy stocks to maintain this dividend. The fund’s beta is 0.14.
However, the fund has been well managed for many years, so it is not a bad investment. We believe 1.95% is too much to pay in expenses for this return. The fund behaves in the market like a bond fund.
The fact that the fund has grown to one-third of his portfolio is a little scary to us. If he has held it for as many years as you say, he certainly has capital gains in the investment. We recommend trimming the investment to 20% to 25% of his overall portfolio. We do not recommend buying more shares at this time. Ultimately, we have problems with the details of the rights offering. The adviser is looking to increase the fund’s assets for future investment opportunities, which include expanding its portfolio to include the energy MLP sector.
Question:
I’ve listened to the show for a while, and I know you prefer individual bonds over bond funds. When are bond funds most appropriate? I see them in my 403(b) plan, but even if I were close to retirement, I should have liquidity outside of my 403(b) right? I also see bond ETFs available. Do they have any advantage over a bond fund?
Answer:
The benefit to bond funds is that they offer diversity. You can make one purchase and have a diversified portfolio of bonds. With short-term bond funds, you, generally, should not experience a loss in value. If the bond fund has durations of two years or less, you should not suffer a significant loss. It is also, generally, cheaper to buy a bond fund rather than to buy several individual short-term bonds. The goal however is to keep the duration short in the current market. Duration is the sensitivity to the price of bonds to changes in interest rates.
You might achieve the duration of a six-month CD, perhaps with a better interest rate, with a floating rate bond fund. However, you still have to be selective, and do your research on the underlying investments for the bond fund. There are some that invest in short-term loans.
We do not recommend long-term bond funds at this time, as the price volatility is significantly more. For long-term, we recommend individual bonds, as you can lock in your interest rate. When held to maturity, you should protect your principal.
At Henssler Financial we believe you should Live Ready, which includes understanding your investments. If you have questions regarding your holdings, the experts at Henssler Financial will be glad to help. You may call us at 770-429-9166 or email at experts@henssler.com.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
