PDT: It’s a Mystery

The John Hancock Premium Dividend Fund (PDT) – a combined preferreds / common stock fund remains a mystery due to its strong backing by loads of retail investors. It’s a mystery because the fund is consistently our lowest rated CEF in the preferreds sector.

The reasons for this are 1) expensive valuation, 2) worst 5-year NAV returns and middling 10-year NAV returns in the sector, 3) worst coverage in the sector, 4) highest management fee in the sector, 5) worst NAV volatility and drawdown metrics in the sector.

From what I can tell it the reason people like it is 1) its consistent distribution and 2) its highest NAV distribution rate in the sector. This is ironic because the distribution rate is, in fact, the thing that is the easiest for a fund to massage – much harder than actually delivering alpha or strong total returns. In other words, some investors treat CEFs as they do stocks – a common stock that hasn’t cut a dividend in 5-10 years is viewed as a quality stock. But while a normal company has to worry about analysts and institutional investors beating it up for having an overly high dividend, this isn’t the case for a CEF which often gets rewarded for it. Truly a mystery.

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