Let thy step be slow and steady, that thou stumble not. – Tokugawa Ieyasu
Ever since its inception in January 1987, DNP Select Income Fund (DNP) has been paying dividends consistently. Its distribution reliability and operational durability are factors that have earned it the reputation of a trustworthy fund for income seekers. This is the reason why its market price trades at a premium to its NAV. For the record, its NAV is $8.47 whereas its market price is $10.09 as of October 5, 2020.
Is the price premium justified? Is DNP a buy for income seekers today? Here’s my take:
Investment Strategy & Portfolio
DNP’s goal is to provide investors with current income and long-term income growth by investing mainly in equity and fixed income securities of companies in the public utilities sector. Capital appreciation is a secondary objective.
As of April 29, 2020, DNP’s balance sheet totaled $3.67 billion. Its borrowings were $997 million as of the same date, and its stockholder’s equity and retained earnings were $2.64 billion and $594 million, respectively.
Its top 10 holdings as of July 31, 2020, that accounted for 27% of its total investments were:
- Eversource Energy (ES): A renewable energy utility
- Ameren Corp. (AEE): Another renewable energy utility
- Xcel Energy (XEL): Yet another company focused on renewable energy
- Crown Castle International Corp. (CCI): Currently riding high on 5G
- Evergy Inc. (EVRG): Kansas-based regular energy utility
- CMS Energy Corp. (CMS): An energy utility that serves Michigan
- NextEra Energy (NEE): Another strong renewable energy company
- WEC Energy Group (WEC): A regular energy utility that serves Wisconsin, Illinois, Michigan, and Minnesota
- American Water Works Co. (AWK): Water and wastewater management utility with strong financials
- Public Service Enterprises Group (NYSE:PEG): An energy utility backed by strong financials
DNP’s top 10 holdings make it clear that the fund’s focus is on energy utilities, and among those, it prefers renewable energy companies. The portfolio choice suggests that the fund managers are on top of the trends and are now actively investing in renewable energy plays because the sector is expected to be one of the drivers of economic growth in the post-COVID-19 era.
As per DNP’s prospectus, the fund estimates it will incur an annual expense of about 1.8% on its net assets. The break-up is as follows:
- Management fees: 0.83%
- Dividend/distribution expense on Preferred Shares: 0.18 %
- Interest on borrowed funds: 0.45%
- Other expenses: 0.34%
In 2019, DNP earned an income of $127 million and its SGA expenses were $29.5 million. Its SGA expenses work out to about 23% of its income. Sure, the expenses are quite high, but if you want to invest in a high-quality income fund, you should be willing to overlook a high expense ratio.
Source: DNP’s Dividend Track Record
DNP intends to facilitate long-term income growth for its investors, but its dividend payouts have more or less stayed steady in the last two decades. If you account for inflation, then its current real dividend yield of 7.73% ($0.78 payout) is lower than what it was many years ago. So, there’s no real dividend growth.
If you are searching for a high-quality, well-managed, and safe income fund, and are prepared to overlook a high expense ratio and live with a dividend yield of about 7%, then DNP is the right choice.
Who knows, its focus on investing in renewable energy securities can help it grow as well and increase its dividend payouts and NAV.
Another factor to consider is that the latest fixed-income rate scorecard (check image below) suggests that the yields are poor on corporate, municipal, and government bonds. Therefore, the well-managed and rock-steady DNP looks like a good choice among income funds even though its dividend growth is stagnant.
Source: My Twitter Feed based on updates in The Lead-Lag Report
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.