How does each Fund produce income?

Each Fund invests in a portfolio of income producing securities consistent with its objectives and guidelines. Each Fund’s strategy is pretty straightforward — maximize income over the long term, while not exposing the Fund’s net asset value to unnecessary risk. Over the long run, the income generated by a Fund’s securities portfolio will be influenced primarily by two things — the level of long-term interest rates (typically measured by the yield on 30 year U.S. Treasury bonds) and the relationship of yields on the preferred securities held by the Fund to those long-term interest rates.

How does leverage impact the amount of the dividend?

Each Fund uses leverage to enhance returns to the shareholders. Most of the time, the Funds are able to borrow money through their issuance of preferred securities at rates well below the rates we can earn on the investment portfolio. Of course, the benefit of leverage is greatest when the spread between the income generated by the portfolio and the cost of leverage is wide. However, the converse is also true; leverage doesn’t provide as much income when the spread is narrow.

Does the hedging strategy impact the amount of the dividend?

Each Fund may, but is not required to, employ a hedging strategy. When employed, is designed to do two things:

Protect the Fund’s net asset value from significant increases in long-term U.S. Treasury rates which occur over a short period of time; and,

Enable the Fund’s dividend rate to increase if long-term U.S. Treasury rates increase significantly over a short period of time.

The mechanism is pretty straightforward — if long-terms rates rise significantly, the hedging instruments used by a Fund should under normal market conditions increase in value. This increase offsets some of the decline in the value of the Fund’s investment portfolio (protecting the Fund’s NAV) and produces gains which can be used by the Fund to purchase additional income-producing securities. Please note that on a temporary or extended basis, the Adviser may determine that hedging Fund holdings is not likely to produce these results. If it does, the Adviser may not utilize any hedging strategy for a Fund or may limit hedging to a large extent, and the above results would not occur. Consequently, the Funds could have less protection of NAV and could generate less income than if the hedging strategies had been used.

There is an expense associated with hedging, however. We like to use the analogy of an insurance policy — each Fund pays premiums (cost of the hedging instrument) to buy insurance, and it collects on the policy if long-term U.S. Treasury rates rise significantly. If rates do not rise significantly, then the Fund will lose the premium it paid without receiving any benefit. Like most insurance policies, generally it is better to have the insurance and not need it than to need it and not have it. However, the Funds may not hedge the interest rate exposure of the portfolio if the Adviser believes that the cost of hedging outweighs the likely benefits of it. Similarly, when viewed historically, if it turns out that the cost of hedging did outweigh the benefits (either because long-term U.S. Treasury rates did not rise significantly or because the hedging instruments the Funds employed did not perform as expected), each Fund will have paid for insurance it ultimately did not need.

In addition, the rate of the insurance premium is a function of many things, but a key factor is the differential between short- and long-term interest rates. As a general rule, when this differential is large, the cost of hedging is high.

How does each Fund balance the factors that affect the dividend?

Income, leverage cost and hedging cost create a three-legged dividend stool, and each leg can move up or down for different or similar reasons. Trying to forecast changes in one leg is difficult enough, let alone three. Consequently, projecting a dividend amount is a mixture of art and science, and becomes more difficult the further out in time we look.

Having said that, we can make some general observations about how the legs of the stool relate to one another. We already noted that falling long-term interest rates and rising short-term interest rates tend to lower income. At the same time, a flatter yield curve (i.e. a smaller difference between long and short rates) lowers the cost of hedging, potentially improving returns going forward. Conversely, rising long-term and short-term interest rates tend to increase income and, at the same time, increase the cost of each Fund’s leverage. Whether the cost of hedging changes depends on how long-term and short-term interest rates move relative to each other. Although far from perfect, over the longer term there is some degree of balance among the three legs of the stool.

Nonetheless, over the shorter term, interest rate changes can adversely or positively impact the income a Fund receives and the cost of its leverage and hedging, and shareholders should consider these changes and their impact on the net income generated by that Fund and consequently the size of the dividend it is able to pay.

How does each Fund report the breakdown between dividends and interest?

Each Fund calculates the breakdown between Qualified Dividend Income (QDI) and interest and report it to shareholders on Form 1099 after the end of the calendar year. We also publish the breakdown on the Funds’ website and in the Annual Report to Shareholders.

Can I reinvest dividends directly into the Funds and is there any benefit over purchasing shares in the open market?

The answer to both questions is yes. Each Fund’s Dividend Reinvestment Plan (the DRIP) provides a means of acquiring additional shares of the Fund without paying the full market premium, if any. When the market price is above NAV, new shares will be issued to participants in the Plan at the higher of NAV or 95% of the then current market price. Participating shareholders can therefore receive a discount on their reinvested shares of up to 5% of the market price. If the market price of the shares is below the NAV, the Plan purchases shares in the open market. The brokerage commission charged for acquiring these shares is competitive with most discount brokers. Shareholders should be aware that not all broker-dealers participate in the Fund’s dividend reinvestment plan. If your shares are held in a brokerage account, ask your broker if his/her firm is set up to participate. If you hold your shares in certificate form, or if you would just like more information, call PFPC Inc. at 1-800-331-1710.

What does Ex-Divrefer to?

Every month the Funds pay dividends, and the value of the dividend is subtracted from the Funds’ NAVs on the Ex-Dividend date each month. So when the NAVs are reported with an Ex-Div behind them, it means that the amount of the dividend has been taken out of the Net Asset Value.

Why did I receive a written (or electronic) notice with my dividend payment?

Section 19 of the Investment Company Act of 1940 (1940 Act) requires registered investment companies to include a notice with the payment of a dividend if a portion of that dividend may come from sources other than undistributed net income. The two other most common sources from which dividends could be paid include the net profits from the sale of securities (capital gains), and paid-in capital (non-taxable return of capital).

The purpose of Section 19 is to afford security holders adequate disclosure of the sources from which dividend payments are made. The numbers included in such notices are only estimates, as the actual characterization of distributions is only determined on an annual basis. Such characterization is then reported to investors on Form 1099 DIV in January of each year. The report will also appear on this website here .

A Section 19 notice generally does not accompany every dividend payment, and the need to send such notice is determined by each Fund individually.