Characterizing ADVDX

ADVDX has always been hard to characterize. Treated conservatively, it looks like an excellent high yielding component for a dividend blend.

I offer no guarantees. You must conduct you own due diligence.

Background

ADVDX created quite a sensation. It has always been controversial, offering a very high dividend yield. There has always been a question of whether its dividend is sustainable. There has always been a question of whether some of the distributions would be better understood (conceptually, not legally) as a return of capital than as a dividend.

I do not address these issues. Rather, I address what happens if ADVDX performs in the future similar to how it has behaved in the past.

Historical Distributions

Here are the annual dividend amounts, as reported by Yahoo Finance.

Year 2009 $0.59
Year 2008 $1.56
Year 2007 $1.64
Year 2006 $1.74
Year 2005 $1.53
Year 2004 $1.18
Total Amount $8.24

The current Net Asset Value NAV has fallen to $4.87 from just over $10.00.

It looks as if early investors have done OK in spite of the fall in NAV. They have most of their money back and enough current value to show a net gain.

The historical distributions have had a steady component along with special dividends.

The steady component has grown from $0.05 eight times a year to $0.07 eight times a year. This growth appears to be reliable.

The special dividend amounts have fallen sharply, disappointing many early investors. But they have continued.

Dividend Blend

The current yield of the steady component of ADVDX is 11.50%. That is, $0.56 per year from eight 7 cent dividends divided by $4.87. I put this into my Simplified Automatic Allocator, assuming zero growth.

I teamed it up with DVY assuming a current yield of 3.97% and a dividend growth rate of 5.5% nominal, the same as for the S&P500 index.

I also assumed 2% TIPS for the cash management side account and a 3% inflation rate.

The continuing withdrawal rate turned out to be 6.77%.

Summary

Assuming that ADVDX continues to survive and perform similarly to how it has in the past, it can help bring up a dividend blend portfolio to a continuing withdrawal rate of 6.77%. This is terrific in today’s market.

This assumes that the smaller, steadily growing dividend component continues to grow as it has in the past. This ignores the special dividend component, which has disappointed in recent months.

Normal caveats apply. Be cautious about inflation. Conduct due diligence. Be prepared just in case something unexpected happens.

I normally recommend limiting withdrawals for the first five years of retirement until you are thoroughly comfortable with your holdings and your investment approach. A withdrawal rate of 5.0% to 5.5% (plus inflation) makes sense with this investment.

Have fun.

John Walter Russell
August 31, 2009