One fund is paying a tempting 11% yield. Another offers 8%. Which one should you reach for?

To answer that, you need to ask the right question.

The question is not, “How high is the yield?” Instead, it’s “How secure is the dividend?” Dividend safety is far more important to total returns than yield size. I touched on this idea a few weeks ago.

World Wrestling Entertainment (NYSE: WWE) chopped its dividend by two-thirds in late April. The shares fell 9% in a day.

Alpine Total Dynamic Dividend Fund (NYSE: AOD) cut its monthly payments in half from $0.12 per share to $0.055 back in June 2010. The shares fell more than 13%.

The good news is that it is fairly easy to assess how secure payouts are — especially for income-focused funds. Here are the three warning signs to watch:

• Return of capital

• Undistributed net investment income (UNII)

• Payout ratio

Return of capital — When a fund makes regular payments consisting of “return of capital,” it can be a signal of a dangerous dividend. Often, these payments are simply returns of an investors’ own capital or shareholders’ equity.

Funds supplement their distributions with returns of capital when investment income or gains aren’t enough to maintain the dividend. In effect, the fund dips into its capital pool to keep up the dividend.

Undistributed net investment income (UNII) — Closed-end funds are required to distribute at least 90% of their taxable income each year to avoid paying corporate taxes on what’s distributed. They also must pass along at least 98% of their income and net capital gains each year to avoid paying a 4% excise tax on what’s distributed.

However, some managers elect not to distribute all income earned during the year and instead pay the 4% excise tax on this income. What’s lost to taxes is gained in asset value, and the UNII can be used to supplement future distributions as needed.

So UNII secures the dividend and bodes well for dividend increases.

In contrast, over-distributed net investment income, when a fund distributes more than it made in a year, may be a sign of dividend danger. The statement of assets and liabilities tells you whether the fund has undistributed or over-distributed income.

Payout ratio — Closed-end fund distributions typically can come from three sources: return of capital, capital gains, and investment income. Of these, investment income from dividends and interest on portfolio holdings is generally the most predictable as they are issued at regular intervals.

The payout ratio provides a handy measure of how much of the fund’s distribution comes from investment income, net of expenses. The ratio provides a quick gauge of how secured the yield is by the fund’s current portfolio holdings. So if a find earns $1.00 per share in net investment income and pays out $0.90, you can quickly see a fund can cover its payments without dipping into its capital or depending on stock gains.

Good Investing!

Carla Pasternak’s Dividend Opportunities

My name is Carla Pasternak, and I serve as the chief investment strategist for Dividend Opportunities.

On the contrary, when you try Dividend Opportunities, the risk is all ours.  (Try getting your broker to take a risk.)  You don’t risk a penny because we’re pleased to offer our weekly email newsletter and our DividendOpportunities.com web site 100% free of charge.

Commentary: But all this bearish news makes me bullish

If you thought the housing crisis was bad, think again.

It’s worse.

New data just out from Zillow, the real-estate information company, show house prices are falling at their fastest rate since the Lehman collapse.

Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month, according to Zillow.

And the percentage of homeowners in negative-equity positions — with a home worth less than its mortgage — has rocketed to 28%, a new crisis high.

Zillow now predicts prices will fall about 8% this year and says it no longer expects the market to bottom before 2012.

“There’s no way we can get to flat, from these depreciation levels, in the last nine months of the year,” says Zillow economist Stan Humphries. “Demand is a lot more anemic than we had previously thought.”

When in 2012 does Zillow see the market bottoming out? Humphries won’t say.

What a foolish boondoggle those tax breaks for home buyers have turned out to be. The government spent an estimated $22 billion between 2008 and 2010 on tax breaks to prop up the housing market. All it achieved was a brief suckers’ rally that ended last summer.

“As we said at the time, it was a giant waste of money,” says Mark Calabria, economist at the conservative Cato Institute. “None of these things really turned the housing market around. They just put off the adjustment for awhile.”

It’s hard to overestimate the scale of the carnage in the housing market. Zillow found prices fell in all but four U.S. metro areas.

Falling real-estate prices mean spiraling hidden losses throughout the economy, from banks to homeowners.

Remember Japan’s “zombie banks”? These were the financial institutions that haunted that country’s economic recovery after the 1990 crash. They staggered on with huge losses they could never repay — the walking dead.

…read more HERE

And once again inflation refuses to accept it is transitory. April Import Price Index was reported up 2.2%, following a revised 2.6% increase in March (previously +2.7%). Notably, the core of the action was in petroleum and food prices.From the release: “Foods, feeds, and beverages prices advanced 1.8 percent in April after a 4.2 percent rise in March.

The April increase was driven by a 22.8 percent jump in coffee prices….The price index for nonfuel industrial supplies and materials rose 1.7 percent in April following a 2.0 percent rise the previous month. Both increases were led by higher  chemical and unfinished metals prices, which increased 2.4 percent and 1.7 percent, respectively, in April.  The rise in chemical prices was driven by a 6.6 percent advance in plastics prices, and the largest contributors  to the rise in unfinished metals prices were prices for gold and other precious metals.” In a nutshell, the 12-month advance in April was the largest year-over-year increase since an 11.2 percent gain between April 2009 and April 2010.

…..read more HERE

Get in cheap while companies are relatively unknown and then pick up doubles, triples, or better when they hit the big time—that is AlphaNorth Asset Management Founder Steve Palmer’s investment strategy. In this exclusive interview with The Gold Report, Steve shares some ideas for spotting big growth potential.

The Gold Report: Adrian, in your 2011 first quarter edition of Portfolio Review, you wrote that President Obama’s budget “shows he doesn’t understand the problem or is not serious about it.” How would you solve the problem?

Adrian Day: Low taxes didn’t cause the problem and high taxes won’t solve it. High spending caused the problem, therefore we have to tackle it by spending less. If you want to cut the deficit, you have to cut spending. If you want to cut spending, you have to go where the money is. You could eliminate every single discretionary item in the budget and hardly make a budge in the deficit. You need to cut entitlement spending—Social Security, Medicare and Medicaid—and defense.

TGR: How is the deficit problem affecting the gold price?

AD: It’s affecting the gold price significantly. The U.S. is borrowing tremendous amounts of money to meet its deficit. Over the last four to six years, China and Japan have been the largest buyers of U.S. debt. For the last six months, China has been a seller. Japan is likely to be a seller when the latest numbers come out.

The Federal Reserve has boosted the adjusted monetary base by over 27% from January to March 2011. It’s printing money to help the economy and to monetize the debt. It is buying Treasuries from the government because nobody else will. The Federal Reserve is buying over 80% of the new Treasuries being issued.

I think the situation is almost hopeless. About 10% of the federal budget is servicing debt. Since the credit crisis in 2008, the government has been doing more funding at the short end. The average yield on 30-year bonds is 2.2%. That’s extraordinarily low. On the new bonds, the average is even lower; I would venture to say well under 1%.

TGR: Standard & Poor’s warned that the U.S. would lose its credit rating should the White House and GOP lawmakers fail to reach a long-term solution to America’s mounting debt load. Is there a way out of this that isn’t good for gold?

AD: I don’t think so. They can’t immediately cut spending enough without putting the country into an enormous depression because so many people are dependent on government paychecks. They can’t raise taxes enough. They can’t raise interest rates.

The only answer is to print money and let the dollar go. The Fed can inflate or default. I don’t think they want to default. So, the Fed will continue deflating and printing money. The more that happens, the less attractive U.S. bonds become to foreigners.

TGR: Where do you see gold stocks and the gold price headed?

AD: I think we’re going to get meaningfully lower prices between now and the end of September. It’s partly a gut feeling, partly the fact that markets don’t go in straight lines for two years without corrections. We’re overdue for a correction in both the dollar and gold. I don’t think a correction in gold will be long and deep. I think gold stocks are going to correct much more than gold itself.

We’ve had some enormous runs in gold stocks in the last year or two. When people see gold start to correct, they will be ruthless in locking in their profits. I think some of the thinly traded juniors could come up significantly. Some of them have come off dramatically—20%, 25%—just in the last month.

In addition, May is often a seasonal peak for gold. So, weakness in July and August would be more typical than not. We just need to be a little bit patient and cautious in adding to positions. But there are some good buys.

TGR: Your firm specializes in gold plays, which appreciated more than 60% last year. Isn’t this a boom for you?

AD: Oh, absolutely. We’re going to play it for all it’s worth.

TGR: What’s the typical asset mix in your gold accounts?

AD: We have gold accounts and resource accounts. In the gold accounts, we have around 25% in the seniors. We have 10% to 12% in non-gold resources, which would include silver and more diversified companies. Then we have about 35% to 40% in exploration. We have about 10% in emerging producers, second-tier companies, like Allied Nevada Gold Corp. (TSX:ANV; NYSE.A:ANV). The rest are companies affiliated with the gold business like investment banks.

….read about Adrian’s comments on the following Companies HERE

AGNICO-EAGLE MINES LTD. ALMADEN MINERALS LTD. BARRICK GOLD CORP. COPPER ONE INC. EURASIAN MINERALS INC. FRANCO-NEVADA CORP. GOLDCORP INC. KISKA METALS CORP. MIDLAND EXPLORATION INC. MIRANDA GOLD CORP. NEWMONT MINING CORP. ROYAL GOLD, INC. VIRGINIA MINES INC. VISTA GOLD CORP.