DNP Select Income Fund (DNP) invests primarily in a diversified portfolio of equity and fixed income securities of companies in the public utility industry. It focuses on current income and future income growth capital growth of this fund is a secondary priority. DNP invests more than 65% of the Fund’s total assets in securities of public utility companies engaged in the production, transmission or distribution of electric energy, gas or telephone services.
Investment Thesis – High yield and stable income but it comes with a caveat
For investors looking for a stable income, DNP offers a good investment. It distributes its dividends monthly and since the underlying assets are mainly invested in utility companies, the dividends are relatively safe as well. Besides investing in common stocks, the fund also has positions in bonds and cash as well as MLPs.
The fund is currently trading at a premium to its NAV, but we will further investigate its current valuation and the risks associated with this fund. Including one big caveat that comes with investing in this fund.
The Fund’s primary investment objectives are current income and long-term growth of income. 74% of the fund assets consist of common stock investments in utility companies such as energy and telecom companies. This offers a relatively safe investment as these kinds of assets tend to be less volatile to changing markets. The other 26% of the assets are in bonds and cash (19%) and 7% of the assets are in MLPs.
DNP is fairly open in its investment policy, it can invest in the securities of domestic and foreign issuers as well as in securities of companies of any market capitalization, including small and mid-cap common and preferred stocks. As for the fixed income securities, it may only invest if, at the time of purchase, the security is rated investment grade by at least two nationally recognized statistical rating organizations.
Distributions – Monthly payments, good yield but no growth
For investors looking for reliable cash flow, DNP is a good choice as it pays its dividends on a monthly basis. In addition, a dividend reinvestment plan is available to registered shareholders to reinvest dividends in additional fund shares.
The annual distribution is $0.78 which currently yields around 6.72%. But when we look at its distribution growth rate in the past 5 years, it can be seen that there has been no growth whatsoever. Personally, for me, this is a big caveat. I do not like funds, in which you invest looking for income, that does not grow their distributions to at least partly offset the impact of inflation.
Valuation – DNP is trading with a Premium to NAV
The current net asset value for TYR is $10.00. With the stock currently trading at $11.60, it is trading at a premium of $1.60.
If we look at the above chart, which is an overview from the past 5-years, you see at the beginning of the chart the fund was still trading near its NAV. However, in the past years, the gap between its trading price and its NAV has only grown larger.
Outlook – Underlying assets look positive
DNP largest holdings are investments in common stock utility companies (74% of DNP’s portfolio), utility companies are naturally relatively stable and safe investments. If we look at the top-3 holdings of DNP we can see that several SeekingAlpha members have a positive outlook on these holdings.
As for the MLP assets, I also believe that these companies have a positive outlook. Recently, I wrote an article on an MLP fund which elaborates more on the outlook of the MLP sector, this article can be found here: Tortoise Energy Infrastructure Closed-End Fund – A Diversified Play On MLPs.
For the fixed income assets, I believe the risks for DNP are limited as well, as they invest only securities that are rated investment grade by at least two nationally recognized statistical rating organizations.
Expense ratio and liquidity
The fund has an expense ratio of 2.31% annually. Which is in my opinion too expensive to be considered as an investment.
As for the liquidity, the fund has an average daily volume of 350.000 shares according to Yahoo Finance.
The verdict – Good yield, but too expensive and no distribution growth
The monthly distributions and yield seem attractive in this fund, however, the gap between NAV and its current trading price is expanding and currently, it is trading at a premium of $1.60. Considering other criteria such as the expense ratio (2.31%) and no distribution growth in the past 5-years, do not make this fund an attractive choice for me.
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.