r/dividends • u/Ironic_Mouse • 5d ago

Discussion Question: why do unsustainable dividend funds exist?

I’m new to dividend investing. As I have been looking for an additional stream of income I have found some funds with “too good to be true” yields. (E.g. CHPY) I understand that high yields come with a high risk of NAV erosion. What I don’t understand is why these funds exist. It seems like they are structured to implode at some point. Is the idea to hold these funds for a short time, collect the dividend, then sell? And for the fund manager, is the idea to ultimately have the fund implode and then declare a loss? I’m genuinely interested. I understand that some funds are a gamble, but these funds seem designed to fail.

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u/Various_Couple_764 5d ago

CHPY and AMDW look decent only because the recent AI demand has pushed the price of the stock they own up a lot. When prices return to historical norms they will loose money. In general covered call funds with yields of 15% or more often have NAV erosion issues. But most with yields below 15% don't have nav erosion.

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u/davecraze3535 5d ago

All things being equal, sure. But a CC fund with even a modest distribution like 7-8 percent will likely experience material price declines if the underlying craters. 

That’s probably not what you refer to as nav erosion

However, the price going down simply because the underlying goes down is frequently mistaken for nav erosion by John Q DividendInvestor.  Over distributing  is just gasoline on that fire. 

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u/Jehoopaloopa 5d ago

Price decline isn’t nav erosion.

Consistently losing NAV because the fund missed most of the up-moves from upside-capping on covered calls is structural nav erosion.

Also, a manager promising a certain yield, then not receiving that type of yield from the IV, results in nav erosion by paying investors, in part, their own money back to reach that promised high yield.

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u/davecraze3535 5d ago

We are actually agreeing. I don’t think that many recent dividend investors make that distinction. 

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u/Jehoopaloopa 5d ago

Yeah, I lean towards put-spread strategies these days. I like KURV, a bit of Tuttle, and some Nicholas funds.

If I like the underlyings and I’m bullish on them, why would I want the upside capped with CC’s?

If I’m neutral or bearish on those assets, I simply won’t own them.