GDV: Discount Remains Wide, Distribution Remains Steady

Written by Nick Ackerman, co-produced by Stanford Chemist.

The Gabelli Dividend & Income Trust (NYSE:GDV) is a closed-end fund that provides investors with a diversified portfolio of equities. The fund has a mostly value-oriented approach, with financials and healthcare as its largest sector exposure. However, you will still see a couple of mega-cap growth names in its top holdings. This fund consistently trades at a deep discount, but over the last few years, this discount has become even wider.

This fund doesn’t sport a highly managed distribution policy that tries to target 10%+ yields, and that is likely one of the reasons it trades at such a large discount. If you want something more exciting, this fund wouldn’t be it.

Our last update was in November 2023. At that time, the equity market was rallying back from the brief market correction we experienced. That’s helped to provide a solid lift in terms of total return for GDV itself. That was even while its discount stayed about the same during this time. More recently, the market has been on a bit of a pause, and once again, higher risk-free rates are the culprit. The expectation is that the Fed will have to delay rate cuts further in the face of sticky inflation, which has sent yields trending higher.

GDV Basics

• 1-Year Z-score: -1.63
• Discount: -17.48%
• Distribution Yield: 6.15%
• Expense Ratio: 1.17%
• Leverage: 12.82%
• Managed Assets: $2.7 billion
• Structure: Perpetual

GDV is described as “a diversified, closed-end management investment company whose objective is to provide a high level of total return.” Their investment policy is:

“under normal market conditions, the Fund invests at least 80% of its assets in dividend-paying or other income-producing securities. In addition, under normal market conditions, at least 50% of the Fund’s assets will consist of dividend-paying equity securities.”

The fund employs leverage through the use of preferred. Most of these are fixed-rate preferreds as well, with a couple that trade publicly, such as the 5.375% Series H (GDV.PR.H) and the 4.25% Series K (GDV.PR.K). These fixed-rate preferreds have helped in the face of significantly higher short-term borrowing rates that other CEFs have had to face in the last few years.

With funds now paying 6%+ on credit facilities, these preferreds are now paying off. They may not have made sense in the zero-rate environment, but it also makes for fewer moving parts in a fund, and that means more predictability.

That Series J being at a 1.70% rate was particularly appealing. That said, the Series J is about to get a lift to 4.5% for the remainder of its, which is a mandatory maturity of March 26, 2028. That higher rate kicked in after the latest dividend paid in March. 4.5% is still better than 6%+.

Holders of Series J Preferred Shares are entitled to receive, when, as and if declared by, or under authority granted by, the Board, out of funds legally available therefor, cumulative cash dividends and distributions, calculated separately for each dividend period, (i) at an annualized dividend rate of 1.70% of the $25,000 per share liquidation preference on the Series J Preferred Shares for the quarterly dividend periods ending on or prior to March 26, 2024 and (ii) at an annualized dividend rate of 4.50% of the $25,000 per share liquidation preference on the Series J Preferred Shares for all remaining quarterly dividend periods until the Series J Preferred Shares’ mandatory redemption date of March 26, 2028.

GDV Comparison To GAB

When I mentioned the more exciting equity funds that one could invest in, this fund has a sister fund that is quite similar. That is the Gabelli Equity Trust (GAB). That fund has a minimum managed distribution policy of 10%. It currently pays just over that on an annualized basis on its NAV, and we just recently discussed that fund in more depth. GAB is the much older sister, born in 1986, compared to GDV’s 2003 inception.

One of the notable differences between GDV and GAB is the difference in distribution policy. However, that plays a significant role in how investors value these closed-end funds at the same time. GAB has consistently traded at a premium, while GDV has almost nearly always traded at a massive discount. The discount has grown more materially for GDV in recent years as well.

At the same time, just because a CEF pays out a higher distribution rate doesn’t necessarily mean it is earning it. Over the last decade, GAB has gotten the upper hand in terms of total NAV returns, but it wasn’t at a spectacular margin. In fact, the divergence has really only appeared in the last year or so when the two started to drift somewhat apart.

Instead, what is happening is GAB is seeing a lower NAV per share over time while GDV is one of the handful of CEFs with a higher NAV now than at its inception. It certainly hasn’t been a linear rise, but it is an equity-focused fund, after all.

The longer a CEF exists, the more of a feat this really can be because most funds do pay out distribution rates. This tends to cause some erosion over time or very limited appreciation. Roughly speaking, if one expects 6 to 10% annualized returns from equities over the long term, it doesn’t matter how you slice it between yield and appreciation. You can take a 6% payout and see a higher chance of appreciation, or take a 10% payout and have a higher chance of seeing deprecation.

GDV could probably bump its monthly distribution up to the 10% NAV rate, and that would be nearly double its current monthly distribution of $0.11. That could likely see its discount narrow substantially, but then it would just make it even more like GAB and leave investors with one less option in this space.

Distribution – Steady

One area in which GDV probably resonates with income-focused investors is its choice to follow a monthly distribution schedule. Income investors tend to favor this more frequent payout rather than quarterly payouts, and GAB follows a quarterly payout schedule.

GDV’s distribution has also been quite steady. They had cut during the Global Financial Crisis but had bumped it up a few times since to get it back to the pre-GFC level. Given the relatively low NAV distribution rate of 5.07% for the fund, that leaves plenty of cushion to avoid cutting the distribution during black swan events. Also, thanks to the significant discount to NAV, the fund’s distribution yield actually comes up a bit to 6.15% for shareholders.

Like any equity-focused CEF, the fund will rely on capital gains to fund most of its distribution. For 2023, the fund had NII coverage of just over 20%. On a per-share basis, the fund’s NII went from $0.20 to $0.27.

The fund has also been repurchasing shares, including its common and preferred-albeit at a snail’s pace, but repurchasing nonetheless. Repurchasing common or preferred shares at a discount – because the preferred are also trading below par, and they are repurchasing in the open market – is accretive to the NAV. At the current pace for each of the common and preferred, the repurchases were accretive by $0.01 per share in each year or a whopping $0.04. So when I say snail’s pace, that’s what I’m referring to, and it is barely moving the needle – though positive nonetheless.

For tax purposes, the common shareholders have seen return of capital distributions.

However, as we always note, watching the NAV is more important. There may have been more ROC distributions classified in 2023, but the fund’s NAV actually rose, meaning it wasn’t destructive.

On the other hand, in 2022, a small amount was listed, yet the fund plunged along with the market and was down around 14.3% on a total NAV return basis. For tax purposes, it simply matters what the fund receives in terms of dividends and interest for the year and what the managers do in terms of realizing gains/losses.

GDV’s Portfolio

Since our last update, we have seen little change in the fund’s underlying portfolio. This isn’t surprising and is consistently the case, as we note with each update. The fund’s turnover rate for the last year was 10%, which was the same rate for 2022. The highest turnover rate in the last five years was in 2019 and 2020, and each of those years saw the turnover rate climb to 16%. Interestingly, the fund lists 12 members in the “portfolio management” for this fund.

So, it’s not too surprising that the fund’s top sector weightings are in the same exact order they were previously. There were some gyrations in the percentage weightings, but that can happen naturally. Financials saw their allocation a bit higher from the 14.3% level previously, while healthcare saw a small decline from the 11.2% allocation.

When looking at the top ten holdings, we similarly see a consistency, but with weightings that are so close, you will get more movement.

Sony Group (SONY) and Alphabet (GOOG)(GOOGL) were previously positions in top spots for the fund but have now been replaced by The Bank of New York Mellon (BK) and Republic Services (RSG). While we can only see a full holdings list quarterly, and the latest available one provided is from the annual report, there is a good chance that SONY is still a position in the fund.

When looking at the first quarter of performance between SONY and RSG, we can make an educated guess on what happened. This change could have come from SONY’s decline in share price performance during this time, at least partially. It’s also possible they reduced their position. At the end of 2021, the ADR SONY shares shared up, and they held 426k. This was then reduced to 382k at the end of 2022, with another small trim to 375k at the end of 2023.

GOOG has performed fairly well, but compared to the other names in the top six, it was slightly edged out. This is another name that they had been trimming over the last year as they took their GOOG position from 319.5k shares to 289.9k. This could still be a position in the fund, but falling out of a top ten spot would suggest that they have continued to trim the position. Seeing the next quarterly holdings list could confirm this; however, they have up to 60 days after the quarter end to provide an update on holdings. Meaning we could have a bit of a wait.

Conclusion

GDV provides investor exposure to a portfolio that tilts towards a more value-oriented approach with its financial and healthcare exposure. Several of the top names, such as Mastercard (MA), Microsoft (MSFT) and Eli Lilly (LLY), have seen incredible growth in terms of prospects or actual earnings growth that has led to significant share price performance. So, you can invest in the “value” space and still get decent growth. At the same time, GDV offers a wide discount on its NAV per share. This has consistently been the case, but the discount has become even wider now in the last few years. The fund has also provided investors with a consistent monthly distribution since the GFC, and that doesn’t appear likely to change anytime soon.