Herzfeld Caribbean Basin Fund’s $0.2325 Dividend Signals Strategic Crossroads

The Herzfeld Caribbean Basin Fund (NASDAQ: CUBA) has declared a dividend of $0.2325 per share, marking a pivotal moment for the fund as it navigates a transformative strategic shift and uncertain market conditions. This distribution, announced on May 9, 2025, underscores the fund’s balancing act between maintaining shareholder payouts and adapting to a high-risk, high-return investment strategy centered on collateralized loan obligations (CLOs).

A Dividend with Dual Risks and Structure

The $0.2325 dividend is structured uniquely: 20% cash and approximately 80% common stock, with shareholders required to elect their preference by June 16, 2025. Those who fail to do so will automatically receive 100% stock. This design reflects the fund’s need to manage liquidity while aligning with its managed distribution policy, which mandates a 15% annual payout based on net asset value (NAV).

The distribution’s composition raises flags, however. Of the total, 91.25% comes from net realized long-term capital gains, while 8.75% is classified as return of capital—a practice that reduces the fund’s total assets and may strain its long-term viability. Cumulative distributions for the fiscal year to date already include 54.4% return of capital, a warning sign for investors relying on sustainable payouts.

Strategic Pivot to CLOs: High Risk, High Reward

The fund’s special shareholder meeting on June 17, 2025, will vote on a major strategic overhaul to shift its focus from Caribbean Basin equities to CLO equity and junior debt tranches. These tranches, which sit below senior debt in capital structures, offer higher yields but amplify exposure to defaults in leveraged loans. The shift fundamentally alters the fund’s risk profile, moving it away from its historical mandate and into an asset class sensitive to economic downturns.

While management argues this pivot could unlock “future opportunities,” the move requires 100% approval of the outstanding shares, a high bar given the risks. The fund’s annual expense ratio of 3.08% and reliance on return of capital further complicate its ability to deliver on this strategy.

Historical Performance: Volatility and Reliance on Capital Gains

The fund’s dividend history reveals significant volatility. From 2006 to 2015, it paid zero dividends, resuming payouts in 2020 at $0.4399 annually before surging to $1.0592 in 2022—a 70.5% jump. However, payouts collapsed by 34.4% in 2023, reflecting market turbulence in its traditional holdings.

The fund’s NAV performance has lagged peers: it fell -14.45% in 2023 while its category averaged +17.84%, recovering only modestly to +2.60% in 2024 versus the category’s +15.86%. Its 12-month total return on NAV as of March 2025 was just 3.98%, underscoring persistent underperformance.

Critical Considerations for Shareholders

1. Proxy Vote Impact: Approving the CLO strategy could lock the fund into higher-risk investments, potentially boosting returns if the economy remains strong but exposing it to severe losses in a downturn.
2. Distribution Risks: The reliance on return of capital (now 54.4% of cumulative 2025 distributions) erodes principal, weakening the fund’s ability to sustain payouts over time.
3. Market Discounts: CUBA’s shares often trade at a 25% discount to NAV, a reflection of liquidity concerns and skepticism about its strategy.

Conclusion: A High-Stakes Gamble for Investors

The Herzfeld Caribbean Basin Fund’s $0.2325 dividend is both a lifeline and a warning. While the payout maintains cash flow for income-seeking investors, its heavy reliance on return of capital and the proposed CLO pivot create material risks. Shareholders must weigh whether the potential rewards of higher yields justify the gamble on an unfamiliar asset class.

Crucially, the fund’s 15% annual distribution target and managed policy flexibility may force asset sales at inopportune times, compounding risks. With 54.4% of 2025 distributions already drawn from return of capital, the fund’s long-term health hinges on the success of its new strategy—and the willingness of investors to ride the volatility. For now, the June 17 shareholder vote will decide whether CUBA evolves or becomes a cautionary tale of overreach.