The Gabelli Dividend & Income Trust (GDV) a closed-end fund, CEF, is well-positioned for a rising rate environment with a focus on the banking sector.
The Gabelli Dividend and Income Trust has performed quite well since inception. The trust is up 60% over the past five years. Mario Gabelli is an excellent asset manager. I like the macro set up for the holding. The following is my bull case.
GDV Stats
Source: CEFConnect
The $2.5 billion GDV fund utilizes leverage of 22.6% by using cumulative preferred shares. The fund is currently trading at a 5.18% discount to NAV aith a 5.76% yield.
Source: CEFConnect
If you are unfamiliar with the CEF structure, don’t worry you are not alone. Here is an excerpt from Morningstar regarding CEFs:
“Even though CEFs have been traded in the U.S. for over a century, CEFs are not well understood. A common misunderstanding is that a closed-end fund is a type of traditional mutual fund or an exchange-traded fund (ETF). A closed-end fund is NOT a traditional mutual fund that is closed to new investors. At its most fundamental level, a CEF is an investment structure (not an asset class), organized under the regulations of the Investment Company Act of 1940. A CEF is a type of investment company whose shares are traded on the open market, like a stock or an ETF.”
You can read up more on CEFs here.
GDV Trust Objective
According to the GDV website, the GDV is a diversified, closed-end management investment company whose objective is to provide a high level of total return. 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. In making stock selections, the Fund’s investment adviser looks for securities that have a superior yield and capital gains potential. Now let’s take a closer look at GDV’s holdings.
Top Sectors
Source: CEFConnect
With over 18% of the holding related to the financial sector, the fund should benefit greatly from a rising rate environment.
Top Holdings
Source: CEFConnect
Full Holdings
JPMorgan Chase & Co (JPM), Honeywell International Inc (HON), Bank of New York Mellon Corp (BK), American Express Co. (AXP), Swedish Match AB (SEK), PNC Financial Services Group Inc (PNC), Mondelez International Inc Class A (MDLZ), Verizon Communications Inc (VZ), Wells Fargo & Co (WFC), Genuine Parts Co. (GPC), Mastercard Inc A (MA), Davide Campari-Milano SpA (CPR), T. Rowe Price Group Inc. (TROW), Coca-Cola Co. (KO), Dr Pepper Snapple Group Inc. (DPS), Yakult Honsha Co Ltd (TYO), State Street Corporation (STT), PepsiCo Inc (PEP), Xylem Inc. (XYL), Pfizer Inc. (PFE), CVS Health Corp (CVS), DowDuPont Inc. (DWDP), Waste Management Inc. (WM), American International Group Inc. (AIG), and Boeing Co (BA).
The fund performed very well in the last rising-rate period from July 2004 through June 2006 when the federal funds rate rose from 1% to 5.25%.
Distribution History
The current distribution rate sits at 5.76% and is paid monthly at a rate of $0.11 per share. Gabelli has steadily increased the payout over the life on the CEF. This is not typical of most CEFs.
Source – CEFconnect
Now let’s take a closer look at the valuation
Valuation
Even though GDV is trading at a greater than 5% discount to NAV, it’s trading for slightly rich valuation on a relative basis according to the current Z score of 2.5 for the last 3 months. This means the fund is trading for a less of a discount than it has for the last three months which was approximately 7%. You can learn more about CEFs and the Z score here.
Source: CEFConnect
GDV is trading at a premium to its historical discount to NAV, yet that does not mean it is presently overvalued. GDV is currently overweight the financial sector which should bode well in a rising rate environment. The fund has a modest expense ratio of 1.4%. Let’s turn out attention to performance.
Performance
GDV is up over 60% for the past five years.
Source: CEFConnect
Gabelli is known for his ability to pick great stocks. I feel comfortable starting a position here even though the fund is trading for a slight relative premium according to the Z score. The technical set-up looks very positive and should provide a substantial margin of safety.
Technical Analysis
The GDV tracks fairly closely the S&P 500
Source: TD Ameritrade
I expect the market to rise on the whole once the trade war fears subside and the Mueller investigation is wrapped up. I see both these events occurring prior to the November mid-term elections. This should lead to a run up into year end. Furthermore, the stock has just recent broken through strong resistance at the 200 day sma.
Current Chart
Source: Finviz
On top of this the 200 day and the 50 day sma are both now trending higher with a Golden Cross being fulfilled recently. This has proven to be an ideal time to buy in my experience.
The Bottom Line
Mario Gabelli is one of the best stock pickers out there. I have been following him for years. As we begin to enter uncharted waters with the Fed now raising rates and quantitatively tightening rather than easing, I feel confident the GDV will outperform the market with the concentration in financials. The 5.7% yield coupled with the opportunity for 20% upside and the solid technical set up lets me sleep very well at night. I like the diversification aspect of this pick for the portfolio as well. I have bought a ½ position for the portfolio today at $23.04. Those are my thoughts on the matter I look forward to reading yours.
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Disclosure: I am/we are long GDV.
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.
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