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A New IPO – Gold Stocks with a 7% Dividend Yield

If you are looking for income and have an interest in gold as an investment, then a new IPO might be what you are looking for to combine the two needs.  Faircourt Gold Income Corp. (FRCGF) is a new closed-end fund that invests in gold stocks and sells covered calls and puts for income.  With the current market flux, gold is a good play until we get more definite information where the fiscal policy and taxes end under the new negotiations.  Why not let professional managers sell covered calls and pay you monthly dividends.  Here are the details.

Faircourt Gold Income Corp., a closed-end investment fund established as a mutual fund corporation under the laws of the Province of Ontario, is offering upon the terms and subject to the conditions specified in this short form prospectus, to issue up to 4,733,740 Class A shares of the Company at a price per Offered Share of $8.45.  The initial IPO was November 9, 2012.

The shares are currently trading at $8.24, a 2.5% discount to the IPO price.  Faircourt Gold Income pays monthly distributions with an annual yield of 7.0%.

 

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The Company will not make any investment that would result in holdings of gold companies comprising less than 60% of the NAV of the Portfolio of the Company at the time of such investment. The Company will not make any investments that would result in holdings of gold bullion comprising greater than 30% of the NAV of the Portfolio of the Company at the time of such investment.

In order to generate additional returns and to reduce risk, the Company has engaged the Manager to employ an option strategy whereby it writes covered call options on securities held in the Portfolio and cash secured put options on securities desired to be held in the Portfolio. It is the Manager’s belief that utilizing the option strategy will assist in providing Shareholders with lower volatility and potentially enhanced returns as compared to owning the individual securities in the Portfolio directly.

The Manager believes that option writing has potential to add value in some sectors more than others. Option writing programs in the past have relied on the volatility of a security as a source of long term capital gains distributions. All other things being equal, sustained volatility in the price of a security results in higher option premiums in respect of such security. The Manager believes gold stocks, which have historically maintained a high degree of volatility, are well suited for a covered call writing strategy. This higher degree of volatility is reflected in the S&P/TSX Global Gold Index which has an historic 10 year average volatility is 36% as measured by standard deviation, between September 2002 and September 2012, while the S&P/TSX Composite Index has exhibited a volatility of 16% during the same period.

Covered call options and cash secured put options may be written from time to time in respect of part of the Portfolio.  The extent to which any of the individual securities in the Portfolio are subject to options and the terms of such options will vary from time to time based on the Manager’s assessment of the market.

Monthly Income from a Covered Call Closed-End Fund

For monthly income investors, the BlackRock Enhanced Capital and Income CEF (CII) offers an investment option for both growth and income.  CII trades at a 10% discount to its NAV.  The dividend yield is 11.47% which is inline with other CEFs in this category.  CII’s previous closing price was $12.59 and has a superior rating by Morningstar.

The fund invests in large-cap value stocks and includes a call option writing overlay (on individual holdings and the S&P 500 Index). Individual holdings are picked based on strong competitive performance, a good balance sheet, excess cash flow, low debt payments, and management with proven ability to effectively manage though various market cycles. Stocks must meet multiple valuation criteria, including low price earnings ratio, low price/book ratio, high dividend yield, and high return on equity. Analysts and managers like companies that are currently out of favor and that they believe have future growth potential.

Over the latest three-year annualized period, the fund gained more than 4%, beating the the S&P 500 Value Index, which lost 2%.  During the first year and a half using the new strategy (the second half of 2007 and 2008), the fund struggled and underperformed the peer group and the index, but performance improved markedly in 2009 as the new management team took over. Strong performance continues:  The fund is up 7% over the past year and down 1.7% for the year to date while peers are up 2.5% over the past year and down 4.6% for the year to date.

Following June’s distribution reduction, the 11% distribution rate is on par with peers. The fund has used destructive return of capital in two of its seven fiscal years: In 2008, almost half was from destructive return of capital, but in 2010, it was less than 10%. The recent 25% reduction is a positive sign, but investors should question whether an equity strategy can earn 11% in this market. If the call strategy is successful and stock picks continue to be profitable, it’s possible.    The fund offers a standard distribution reinvestment program. If the fund is trading at a premium (including brokerage commissions), then the dividend amount is invested in to newly issued shares.

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