Nov 08 2014

My Latest Buy: VFL

stock_buyI’ve been aware of Delaware Investments National Municipal Fund (NYSE:VFL), a municipal bond fund, for the past few months. So last week I made my move and bought 100 shares of VFL at $12.96 per share. At the price I bought VFL, its dividend yield is a decent 6.01%. VFL is my 15th holding (including my employer’s stock grants), so I’m one step closer to having 20-25 positions in my dividend investing portfolio.

Here are the positives about VFL:

Yield. While a yield of 6.01% doesn’t exactly make me giddy with excitement, it is completely tax-free, which makes it equivalent to a taxable 8-9% yield, so it’s actually a respectable yield compared to taxable dividends. In addition, during the past few years the dividend has modestly increased, so hopefully the trend will continue and its dividend will grow.

Call exposure. A quick word about how bond calls work: Callable bonds have call provisions, which allows a bond issuer to purchase bonds back from bondholders and retire the issue. This usually happens when interest rates have dropped sharply since the bond’s issue date. Call provisions allow an issuer to retire their old, high-rate bonds and sell low-rate bonds as a way to lower debt costs. VFL’s bond call exposure is unusually low, 2½-4¼% for the next 3 years. Plus the majority of its bond holdings are very long term, typically 15-30 years.

Age. VFL has been around since 1993, so it has gone through two recessions (the dot-com implosion of 2001, and the Great Recession) in the past 21 years. This gives me confidence in management’s ability to navigate VFL through the choppy waters of recessions.

However, VFL has its negatives as well:

Leverage. A leverage rate of 32.42% is rather high, which increases this stock’s risk level. Leverage is great when times are good, as it magnifies gains, but when things turn bad then leverage amplifies losses.

Institutional investment. With an institutional investor ownership of 13% of VFL, there doesn’t seem to be a high level of confidence in VFL.

Still, I think VFL’s positives outweigh its negatives, so it’s a good, but risky, investment choice. With this stock acquisition, my projected average monthly dividend income increases to $521.73, or a projected annual dividend income of $6260.70. Nice!

Addendum (11/15/14):  I just bought an additional 55 shares of VFL, which bumps up my projected average monthly dividend income to $525.30 and my projected annual dividend income to $6303.60. Yeah!!

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