Dividends4Life: Too good to be true dividends

Too good to be true dividends

Posted by D4L | Thursday, May 13, 2010 | | 0 comments »

Closed-end funds have insanely high yields and offer people a chance to generate substantial income while they wait for interest rates to inch their way up from the bottom. Gabelli Utility Trust (GUT), for example, is selling at a whopping 58% premium. By now you can probably guess why an investor would be willing to pay such an incredible premium-- the fund offers an extremely generous 9.3% yield.

That yield that you're probably gushing over right now is incredibly deceiving. Closed-end funds have what is called a "managed distribution policy," where they can return to the investor not only a regular dividend, but also long-term capital gains -- and even a portion of your original capital. This is done to provide investors with some semblance of a steady cash flow. Capital gains and original capital shouldn't be included in the yield calculation, but most times, they are. For instance, even though Gabelli's yield looks like 9.3%, the actual "income-only" yield is about 3.7% -- quite a surprise for investors who think they're getting a high traditional yield.

Source: Motley Fool

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