expenses VS dividend?

[Barbarossa]

I've never been able to get a clear answer on the relation between expenses and dividend yield.  Example:  BKN.  It has an expense ratio of 1.46% and a divvy yield of 5.72%.  So if I'm getting 5.72% year after year, do I care what the expense ratio is?  As long as I'm getting my 5.72% yield, does it matter?

Many thanks for your comments!

[capitalninja]

It does matter because you're not really getting 5.72%. Assuming the dividend remains flat for the year, you're return (before taxes) is 5.72% - 1.46% so 4.26% dividend. There are many individual stocks (MLPs, Utilities, REITS, etc) that can give you that type of dividend *without* the excessive fees.

The problem with a 1.46% expense ratio is that it doesn't only hurt you from a dividend net return. It reduces the capital appreciation return as well. If you hold the security long term, that reduction in return compounds. Think of high fees the same way you think of credit card debt interest. Both compound over time and end up costing you more money. The price of BKN will fluctuate over time while the fee you're paying remains constant and will act as a constant drag on your returns.

Expenses compound negatively which reduces your overall return over the long term. The longer you hold the security, the worse it gets. So "yes" you definitely should care about fees.

[GGNoob]

I'm not sure how that fund works, but some funds take their fees out of the dividends. So if your yield is 5.72% and the expenses are 1.46%, you only collect 4.26% dividends. If they don't take it frunt he dividends, they will sell shares to pay for it. So yes, you always care what the expense ratio is.

[MDM]

I'm going to summarize what I observe from http://www.morningstar.com/cefs/XNYS/BKN/quote.html, then let others more knowledgeable correct those observations if needed.

On 01/13/16 BKN distributed $0.074/share to shareholders.  They make these distributions monthly.  The share price that day was $15.56.  Annualizing, that gives $0.074/$15.56*12 = 5.71% as the investment return.  Seems close enough to the listed 5.72% "Total Distribution Rate."

From that I would conclude the ~5.7% is distributed after the expense fee (either 1.46% or 0.90%) has been taken.

[MustacheAndaHalf]

Investment Quality Municipal Trust (BKN) is a leveraged junk bond ("high yield") fund.  I can't find it's SEC 30-day yield, but it's yield to worst is 2.91%.  Take a look at it's 3 year track record, too:
Market price return, 3 yrs to Nov 30, +1.8% (according to Black Rock's website).
The yield you see now isn't a guarantee of what you'll get.

[mrpercentage]

I like zero fee direct stock purchases.

In a taxable it looks like this

ConocoPhillips dividend 7.1% with an expense ratio of zero. The taxes for dividends are 15% of the dividend. So 15% of 7% is 0.07% taxed expense ratio. 100% invested. I collect those dividends whenever I want but they could also get cut or go away. Higher risk; higher reward.

[mrpercentage]

come on.. no one wants to say 1%

it must be early

[Barbarossa]

Still confused.  CapitalNinja, I've owned BKN since '09, and I AM getting paid around 5.8% a year.  I just went back and divided my annual dividends into the value of BKN for that year, averaged it all to get the 5.8%.  Yes, the NAV has fluctuated up and down, but I don't care, I'm in it for the annual income.  The dividend history chart here:

http://www.dividendchannel.com/symbol/bkn/

seems to show a consistent payout, with one dip in 2008.  And even the price hasn't fluctuated as much as the stock market itself.  As a Moustachian, I'm looking for income that beats the 4% take-out rule, and this seems to work.  I'm not here to defend BKN, I'm a long way from an expert, I'm just trying to figure out what is going on.  I have a portfolio full of cefs/etfs that have been paying me income over 4% for years, but I've never gotten a solid answer to my question.  Notice that even here I get differing opinions?  I have to assume, based on BKN and my other cefs and etfs, which are paying as advertised, that fees do not come out of dividend yield.  But it would be nice to have an expert confirm it! 

Thanks all.

[faramund]

I like zero fee direct stock purchases.

In a taxable it looks like this

ConocoPhillips dividend 7.1% with an expense ratio of zero. The taxes for dividends are 15% of the dividend. So 15% of 7% is 0.07% taxed expense ratio. 100% invested. I collect those dividends whenever I want but they could also get cut or go away. Higher risk; higher reward.

15% of 7% = 1.05% (i.e. 15*0.07). I don't know where you get 0.07% from

[faramund]

Still confused.  CapitalNinja, I've owned BKN since '09, and I AM getting paid around 5.8% a year.  I just went back and divided my annual dividends into the value of BKN for that year, averaged it all to get the 5.8%.  Yes, the NAV has fluctuated up and down, but I don't care, I'm in it for the annual income.  The dividend history chart here:

http://www.dividendchannel.com/symbol/bkn/

seems to show a consistent payout, with one dip in 2008.  And even the price hasn't fluctuated as much as the stock market itself.  As a Moustachian, I'm looking for income that beats the 4% take-out rule, and this seems to work.  I'm not here to defend BKN, I'm a long way from an expert, I'm just trying to figure out what is going on.  I have a portfolio full of cefs/etfs that have been paying me income over 4% for years, but I've never gotten a solid answer to my question.  Notice that even here I get differing opinions?  I have to assume, based on BKN and my other cefs and etfs, which are paying as advertised, that fees do not come out of dividend yield.  But it would be nice to have an expert confirm it! 

Thanks all.

I don't know any particulars for BKN, but all managed investments have an expense ratio, and some how or other they get paid. It seems like there are only three possibilities: they reduce your capital base, they reduce your dividends, or some combination of the two. I suppose they could also ask you to pay a fee each year, but from your post, I'm guessing they're not.

If you put $1000 into BKN, ten years later, can you take that $1000 out again (possibly minus some entry/exit fees). If you can, it means they're not reducing your capital base. So all that leads to, is it must be coming out of your dividend.

So you say you're getting 5.8% a year, so if say their expense ratio is 1%, I'd assume its really, in gross terms, earning 6.8%.

[mrpercentage]

I like zero fee direct stock purchases.

In a taxable it looks like this

ConocoPhillips dividend 7.1% with an expense ratio of zero. The taxes for dividends are 15% of the dividend. So 15% of 7% is 0.07% taxed expense ratio. 100% invested. I collect those dividends whenever I want but they could also get cut or go away. Higher risk; higher reward.

15% of 7% = 1.05% (i.e. 15*0.07). I don't know where you get 0.07% from

Read my next post lol... I caught one! The thing I like about you guys is you don't take someones word for it. You must all be from Missouri

[faramund]

I like zero fee direct stock purchases.

In a taxable it looks like this

ConocoPhillips dividend 7.1% with an expense ratio of zero. The taxes for dividends are 15% of the dividend. So 15% of 7% is 0.07% taxed expense ratio. 100% invested. I collect those dividends whenever I want but they could also get cut or go away. Higher risk; higher reward.

15% of 7% = 1.05% (i.e. 15*0.07). I don't know where you get 0.07% from

Read my next post lol... I caught one! The thing I like about you guys is you don't take someones word for it. You must all be from Missouri

Ok, me bad ... In my defense, I did read the following post, but I thought it was from someone else, and didn't know what they were getting at.  It all makes more sense now.