Franklin Universal Trust (“FT” or the “Fund”) Announces Notification of Sources of Distributions
- None.
- None.
Insights
Examining the distribution announcement from Franklin Universal Trust, it's noteworthy that the majority of the distribution for January 2024 is attributed to net investment income and net realized short-term capital gains, with no allocation to long-term capital gains or return of capital. This allocation could signal a focus on income-generating investments and active portfolio management strategies that result in short-term capital gains. Investors typically look for a balance between income and growth, so a higher percentage of income could appeal to those seeking regular cash flow.
From a fiscal year-to-date perspective, there is a significant portion of the distribution classified as return of capital (31%). Return of capital reduces an investor's cost basis in the investment and is not taxed until the holding is sold. While this can provide tax advantages, it may also indicate that the fund's investments are not generating enough income or capital gains to cover the distributions, which could be a point of concern for long-term sustainability.
Understanding the context of these distributions within the broader market is crucial. In a market environment where interest rates are fluctuating, the allocation to net investment income suggests that Franklin Universal Trust may be well-positioned with interest-bearing assets or dividend-paying stocks that perform consistently in such conditions. However, the reliance on short-term capital gains could suggest a higher turnover within the portfolio, which might increase transaction costs and tax implications for investors.
Furthermore, the 31% return of capital for the fiscal year-to-date might raise questions about the fund's performance compared to its peers. Investors often compare distribution components across similar funds to gauge performance and strategy effectiveness. A higher return of capital could imply that the fund is prioritizing maintaining its distribution rate, potentially at the expense of capital growth, which may not align with investor expectations for long-term appreciation.
From a taxation perspective, the nature of the distributions has significant implications. The net investment income portion is typically taxed at ordinary income rates, whereas short-term capital gains are also taxed as ordinary income. This differs from long-term capital gains, which are often taxed at a lower rate. The absence of long-term capital gains in the distribution suggests investors will not benefit from the lower tax rates associated with those gains.
The return of capital, while not immediately taxable, effectively defers tax liability and lowers the investor's cost basis. This can be advantageous in the short term but may result in higher capital gains taxes when the shares are eventually sold. Investors should consider how these distributions align with their individual tax planning strategies and the potential impact on after-tax returns.
Notification of Sources of Distributions Pursuant to Section 19(a) of the Investment Company Act of 1940 |
The Fund’s estimated sources of the distribution to be paid on January 31, 2024 and for the fiscal year 2024 year-to-date are as follows:
Estimated Allocations for January Monthly Distribution as of December 31, 2023:
Distribution
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Net Investment
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Net Realized
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Net Realized
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Return of
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Cumulative Estimated Allocations fiscal year-to-date as of December 31, 2023, for the fiscal year ending August 31, 2024:
Distribution
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Net Investment
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Net Realized
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Net Realized
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Return of
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Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of the current distribution or from the terms of the Fund’s Distribution Policy. FT estimates that it has distributed more than its income and net realized capital gains; therefore, a portion of the FT distribution to shareholders may be a return of capital. A return of capital may occur, for example, when some or all of the money that a shareholder invested in a Fund is paid back to them. A return of capital distribution does not necessarily reflect FT’s investment performance and should not be confused with ‘yield’ or ‘income’. The amounts and sources of distributions reported herein are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Fund’s investment experience during the remainder of its fiscal year and may be subject to changes based on tax regulations. The Fund will send a Form 1099-DIV to shareholders for the calendar year that will describe how to report the Fund’s distributions for federal income tax purposes.
Average Annual Total
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Annualized
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Cumulative Total
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Cumulative Fiscal
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Fund Performance and Distribution Rate Information:
- Average Annual Total Return in relation to NAV represents the compound average of the Annual NAV Total Returns of the Fund for the five-year period ended through December 31, 2023. Annual NAV Total Return is the percentage change in the Fund’s NAV over a year, assuming reinvestment of distributions paid.
- The Annualized Distribution Rate is the current fiscal period’s distribution rate annualized as a percentage of the Fund’s NAV through December 31, 2023.
- Cumulative Total Return is the percentage change in the Fund’s NAV from August 31, 2023 through December 31, 2023, assuming reinvestment of distributions paid.
- The Cumulative Fiscal Year-To-Date Distribution Rate is the dollar value of distributions for the fiscal period August 31, 2023 through December 31, 2023, as a percentage of the Fund’s NAV as of December 31, 2023.
The Fund’s primary investment objective is to provide high, current income consistent with preservation of capital. Its secondary objective is growth of income through dividend increases and capital appreciation. Distributions may vary based on the Fund’s net investment income. Past distributions are not indicative of future trends.
For further information on Franklin Universal Trust, please visit our web site at: www.franklintempleton.com
Franklin Resources, Inc. is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,300 investment professionals, and offices in major financial markets around the world, the
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Franklin Templeton
1-800-342-5236
Source: Franklin Templeton
FAQ
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