Dividend Avoidance with FAV

A reader mentioned FAV in a comment on dividend capture. FAV is a closed end fund which holds a heterogeneous collection of high dividend paying stocks, like BHP Billiton, Merck, Occidental Petroleum, and Annaly Capital Management. Looking for more information about it, I came across an interesting post on Seeking Alpha describing a dividend avoidance strategy.

The author claims that there is a run up in price three to four weeks before the ex-dividend date due to traders who want to capture FAV’s 0.46 quarterly dividend. Then a collapse after the ex date.

FAV price

Here is a list of the last few ex-dividend dates:

10/21/2009: price ran up to 13.50 from 12 and a quarter at the beginning of the month.
7/22/2009: FAV ended June around 10 and ran up to 11 and a half.
4/22/2009: FAV ended March at less than 8 and got past 9 by ex date.
12/29/2008: FAV started December at less than 7, and got to 8 and a half.
10/20/2008: FAV ended September around 9, only got to 8.7 before the ex-date. It dipped as low as 6.
7/18/2008: FAV started July around 12 and never got much above that.
4/18/2008: Started the month around 12 and went to 12.20.

Three good moves and one loss and one scratch and one small profit. Not a bad run.

Is This Rational?

It is well known that it is individual investors who buy closed end funds. This buying interest before the ex-dividend date, if we agree that is what we are seeing, is irrational. The net asset value of the fund should be unchanged by the payment of dividends by the stocks that it holds. The price of the fund itself should drop by the dividend amount it pays, modulo tax considerations. So there should be no extra interest in FAV around dividend paying time.

A commenter on the original article mentioned that the same phenomenon can be seen with master limited partnerships like ETP, EPD, BPL, and OKS. It will be interesting to look at this.