Every now and then, we have a “big-dividend shootout”—we pit two big payers against each other and see which one wins out.
It’s a great way for us to accomplish two things as investors: 1) Grab the safest high dividends with the most upside, and 2) Sharpen our portfolio-building skills.
My beat is closed-end funds (CEFs), which are known for huge (and often monthly paid) dividends. These actively managed funds are a bit of a unique challenge to analyze because they each hold a lot of assets—often numbering in the hundreds.
Luckily there are a few indicators we can use to single out the best ones. Let’s demo those with today’s contenders, both of which are tech CEFs: the 5.8%-yielding Columbia Seligman Premium Technology Growth Fund (STK) and the BlackRock Innovation and Growth Term Trust (BIGZ), with a 7.2% payout.
Portfolio Analysis: 2 Funds With Different Takes on Tech
Let’s kick things off with this pair’s top holdings, starting with STK.
As you can see, these stocks skew toward scale and value, with dominators like Microsoft (MSFT), Broadcom (AVGO), NVIDIA (NVDA) and Apple (AAPL) appearing among its top-10 holdings. These 10 names account for nearly half of STK’s portfolio, and the rest of its holdings look a lot like these.
This table also gives us a snapshot of how the fund works: Management sells shares in STK and invests the cash in these big cap stocks. Later, it takes profits and uses the cash to pay dividends.
Since the tech sector has posted a 9% annualized total return in the last 25 years (that’s starting in 1999, at the peak of the dot-com bubble), STK can easily maintain its payout.
Now let’s shift to BIGZ, whose 7.2% yield is more generous. Its portfolio is more aggressive, too:
To be sure, BIGZ’s top-10 holdings are far from household names, and the same goes for pretty much all of its portfolio. That’s because BIGZ focuses on mid- and small-cap firms, where STK invests in big caps. You’ll also see “Project Rocket” in the No. 10 spot above. This is a private-equity investment that hasn’t yet gone through an IPO.
So far, then, we’ve established that these two funds, while both invested in tech, have very different philosophies. So how have their strategies played out on the ground?
Past Performance: STK Wins, But It’s Still Early Days
You’d think the focus on growth companies at BIGZ (in purple below) would drive the fund ahead of STK’s more established choices. But that would be the wrong take:
As we can see above, BIGZ (in purple) has dropped a bit more than 50% since its launch in mid-2021, even with dividends included. However, much of that can be attributed to timing, with the fund going public when tech was in its own mini-bubble that has since popped. As a result, a lot of the investments BIGZ made then have been marked down, and the fund has struggled to recover.
STK (in orange above), on the other hand, has given investors a nice 40% return. And that’s not all.
STK has survived a lot of turmoil since it launched 15 years ago, yet it has still delivered an outsized 14.5% annualized return (with dividends reinvested). So it’s no surprise the fund has had no problem maintaining its dividend. It’s even paid special dividends.
Discounts: STK Is Expensive, BIGZ Is Way Oversold
Reading this far, you might think STK is the winner. Well, not so fast. We still haven’t talked about the discount to net asset value (NAV, or the value of the fund’s assets).
These discounts—a key value indicator with CEFs—exist because CEFs generally have a fixed share count for their entire lives, so they can (and regularly do) trade at levels different than their portfolio values. In the case of these two funds, the discount story is different:
As you can see above, STK (in orange) trades at a slight premium to NAV, meaning investors are willing to pay more than its assets are worth. That’s far from the case with BIGZ (in purple), which sports a 16.4% discount. That deal exists because the fund has struggled in the short period it’s been around. STK, meantime, has a long history that gives investors confidence, hence the premium.
Of course, we don’t want to buy assets for more than they’re worth, even if buying STK now will likely get us profits and reliable income in the future. The slight premium also means we should expect STK’s profits to track its portfolio’s performance, which isn’t bad. But we can expect more with BIGZ, with its profits likely to track the portfolio’s performance and grab an extra boost when its discount closes.
But will that discount close? There’s reason to think it will, even if it’ll take time.
Note the word “Term” in BIGZ’s name. It means the fund is scheduled to be liquidated at its NAV 12 years after launch. That means any discount will turn into instant extra profit.
Granted, we’ll have to wait until March 26, 2033, when BIGZ is scheduled to terminate. But other investors may buy more of BIGZ at a discount before then, in anticipation of the fund terminating.
If that sounds like free profit, it is. But there’s a catch: Management can extend the dissolution by a year and a half. And if they don’t sell all of BIGZ’s shares when it’s slated to close, the fund can keep running as long as some other conditions are met.
Dividend Sustainability: We’ll Call It a Draw
BIGZ’s discount does give it another edge: It makes the dividend safer.
Let’s break down this idea a bit: As I write this, BIGZ yields 7.2%, based on its market price. However, due to the discount, that yield calculation only comes out to 6% based on the per-share value of its NAV. That’s another way of saying that management only has to earn 6% in the market to keep that 7.2% payout flowing our way.
STK, for its part, yields around 5.8% as I write this and as I said a second ago, trades at a slight premium, so the payout remains about 5.8%, whether you calculate it based on per-share NAV or the market price.
Think BIGZ as a Short-Term Play, STK for the Long Haul
In the end, BIGZ has much more risk and reward than STK for anyone planning to hold for less than a decade. Meantime, STK is the kind of fund you can buy today and lock away for the rest of your life (although I’d recommend waiting for it to sell at a discount again, like it did in 2020 and for much of the 2010s, and buying another high-quality tech CEF at a discount in the meantime).
Anyone who simply looked at these two funds’ yields and went no further wouldn’t realize any of the things we just discussed. It just goes to show that there are almost certainly CEFs out there that fit your portfolio. It just takes a bit of digging to make sure you find the right ones.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 10.9% Dividends.”
Disclosure: none
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