Tuesday February 28, 2012
by Brian Hicks & Briton Ryle, editors Wealth Advisory
Blackrock Global Opportunities (BOE) is closed-end fund that's paid 15% dividends every year since it was created in 2006. Yes, that means it kept paying these dividends right through the financial crisis of 2008.
It's a $1 billion fund that holds stocks like Exxon-Mobil, Pfizer, Shell, Proctor & Gamble, and JP Morgan. It even owns Google and Apple.
Now, you'll probably notice that none of these companies pays a particularly large dividend. And a few don't pay any at all.
So how does the Blackrock Global Opportunities Fund pay 15% a year to its investors? It sells covered call options on its stock holdings to generate income. A call option is a contract that allows the contract holder to buy shares of stock at pre-determined price and time.
The farther out into the future you go, the more such a contract is worth even if the agreed upon sale price is higher than the current price.
So, if you own stock, you can make money by selling the right to buy that stock. That's exactly what the managers of this Blackrock fund do.
Options are often considered risky. But selling covered calls is about as low risk as you can get. The worst-case scenario is that your stock is "called" away, that is, sold.
You've already been paid a certain amount for the call option, and you also get paid for the stock. The only real risk is opportunity loss, if the stock continues higher after you've sold it.
But for the purpose of the Blackrock Global Opportunities Fund, which is to generate income, the covered call strategy is a perfectly sustainable strategy.
The fund currently trades around $15 a share. Its net asset value is $15.69. Buying at current levels represents a 4% discount to NAV.
And, this fund has a tendency to return to its NAV, and sometimes even trades at a premium to NAV. So in addition to the 15% dividend, you could get 4% capital appreciation from the fund.
Blackrock Global Opportunities Fund doesn't have the longest history, but in its six years of existence, it's been a consistent dividend payer.
The expense ratio of 1.1% is not outrageous; its covered call strategy is a solid strategy and should make for consistent dividend payments in the years to come. Buy at or below $15.
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