Friday, February 13, 2015

Compounding So Quickly

While I no longer officially track my dividend portfolio, I do currently hold seven stocks that pay monthly dividends (AOD, OIBAX, O, CSQ, NTC and FSC). With my multiplier, they generate $2,878 of income per month. And that is steadily growing as I reinvest the dividends. Roughly speaking, it grows (all else being equal) about 7% a year, so would double in ten years. Should help fund a comfortable retirement.

While AOD is my largest, I'd like to focus on CSQ for a moment (2nd largest).

CSQ is a closed end fund. I have touted these here from time to time. You can go to a great web site (CEF Connect) and screen a number of closed end funds. A really cool thing about closed end funds is that they generally sell at a discount to their Net Asset Value (NAV). CSQ for instance trades at 11.42, and has a NAV of 12.40. That means it sells at a discount of 7.9%.

You can go to CEF Connect and see what the discount (or premium) to NAV is and what it has been historically. A cool feature of that is that you can get a clear buy signal. So CSQ in past 12 months has traded at an average discount of 6.9% and has ranged from 11.4% to 3%. I don't know about you, but I would much rather buy a security selling at a 12% discount to NAV than 3%. So you can get a clear buy signal.

You can use this effectively if you watch. I bought my initial stake on 8/23/11 at 8.37.  The NAV that day was 9.58 (you can see this in yahoo finance using ticker xcsqx).  So I got it at a 13% discount (recall that is when S&P downgraded US and there was a lot of volatility).  My gain on that purchase is 72%.

My next material add was 10/8/13.  On that day, the NAV was 11.35 and I bought my shares  at 9.86. Again a 13% discount. That purchase is up 29%.

Finally, my most recent big buy was 10/16/14 when the market was going through a correction (recall almost a 10% drop). The NAV was 11.55 and I got to buy at 10.34, a 10.5% discount. I am up 14% already on that.

My point is that investing in CEFs can be rewarding and you don't have to be a rocket scientist to know when a buy signal is flashing.  Find a CEF that suits your appetite (look at the leverage they use, distributions and management/size), then track it until the discount widens and that is signal to buy. It can still drop obviously, but the added discount implicitly gives you some margin of safety.

As a note here is where my other CEFs trade

AOD at a 14.7% discount (huge). It has swung in past 12 months between 11.7% and 15.7%.
NTC at 13.5% discount. Range has been 10.8% to 15.3%.

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