Tri-Continental Corporation's Dividend Surge: A Testament to Resilience in a Volatile World

Amid a market environment marked by geopolitical tensions, interest rate uncertainty, and sector-specific volatility, Tri-Continental Corporation (TY) has announced a 4.8% dividend increase, extending its 80-year streak of uninterrupted payouts. For income investors, this raises a critical question: Can this closed-end fund sustain its dividend growth while navigating risks tied to its energy and financials exposure, and how does its conservative leverage structure support—or undermine—this ambition?

A Legacy of Dividend Discipline

With a dividend history spanning eight decades, Tri-Continental has proven its ability to deliver steady income through market cycles. The recent 4.8% hike, bringing the annualized distribution rate to 3.23% based on NAV, underscores management’s commitment to rewarding shareholders. This move is particularly notable given the fund’s NAV discount of -12.37% (as of mid-2024), which amplifies the effective yield for investors buying shares at a discount to intrinsic value.

Portfolio Composition: Balancing Growth and Risk

Tri-Continental’s portfolio is structured to balance risk and return, but its sector allocations warrant scrutiny. As of late 2024, 11.4% of assets were in financials, a sector sensitive to macroeconomic shifts and credit cycles, while 3.2% were allocated to energy, a space prone to commodity price swings and regulatory headwinds.

While these allocations are moderate, they introduce tailwinds and headwinds. For instance, a strong tech sector (18.7% of assets) and convertible bonds (6.9%) provide growth and income flexibility. However, should energy or financials underperform—a distinct possibility in a recession—this could pressure NAV and, by extension, dividends.

Leverage: A Double-Edged Sword?

Tri-Continental’s leverage ratio of 1.96% of total common assets (as of July 2024) is exceptionally low for a closed-end fund. This conservative approach limits the risk of margin calls or forced asset sales during market downturns, shielding NAV stability. Unlike leveraged peers that amplify losses in volatile environments, Tri-Continental’s minimal leverage ensures its dividend is less tethered to short-term market noise.

Crucially, its $37.6 million in preferred stock liabilities are fully covered by 200% asset-backed collateral, a regulatory requirement that adds a safety buffer. While leverage can magnify losses, this fund’s prudent structure makes it a safer bet for income investors than its highly leveraged counterparts.

Valuation Discount: A Margin of Safety

The fund’s shares have consistently traded at a -12% discount to NAV, a gap that persists despite strong NAV performance (17.99% annualized return over 12 months as of mid-2024). This discount creates a compelling entry point: investors effectively pay 88 cents for every dollar of NAV, while also benefiting from dividends and potential NAV growth.

If the discount narrows—say, to -8%—shareholders could see a ~4.6% uplift in price alone, compounding returns alongside distributions. This dual-income-and-appreciation dynamic is rare in today’s market and merits serious consideration.

Risks to Consider

• Energy and Financials Exposure: A recession or oil price collapse could pressure these sectors, impacting NAV.
• Capital Gains Dependency: The December 2024 distribution included a $1.95 capital gains payout, which may not recur if realized gains diminish.
• Discount Persistence: If the NAV discount widens further, it could offset dividend gains.

Conclusion: A Compelling Income Play for the Long Term

Tri-Continental Corporation’s 4.8% dividend hike and 80-year dividend record are testaments to its disciplined strategy. While risks exist—particularly in energy and financials—the fund’s ultra-low leverage, discounted valuation, and diversified portfolio create a sturdy foundation for income investors.

For those with a 5+ year horizon, this is a rare opportunity to lock in a 3.23% yield (based on NAV) at a price below intrinsic value. The combination of dividend consistency, leverage discipline, and the potential for discount narrowing makes Tri-Continental a standout pick in a yield-starved market.

Act now—before the discount closes, or the dividend’s allure draws more buyers.