When a reader suggested I look at Cornerstone Strategic Value Fund’s (NYSE: CLM) dividend safety, I was intrigued.

It pays a 20% yield.

That’s not a typo… 20%.

The fund invests in growth and value stocks. Its largest holdings are Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN) and Alphabet (Nasdaq: GOOGL).

Apple pays a 1.4% yield. Amazon and Alphabet don’t pay a dividend. Neither does the fund’s sixth-largest holding, Facebook (Nasdaq: FB).

So how, in the name of all that is holy, can this fund pay a 20% dividend yield?

Return of capital.

If it does not generate enough income or capital gains to pay the dividend, it returns capital to shareholders, which decreases the net asset value (NAV). In other words, it returns shareholders’ money to them in the form of a dividend.

A Dividend Policy Doomed to Fail

The fund’s policy is to pay out 21% of its NAV in the form of dividends. But remember, if the fund’s returns don’t equal the dividend, the NAV falls. So if it continues to pay the same percentage of a declining NAV, the dividend has to decline with it.

And 21% is a pretty high hurdle to clear in terms of returns. If a fund manager returned 21% year after year, they would be legendary. So far this year, the S&P 500 has returned less than 6%. So even if the market gets going in the final months of the year, the fund will need some incredible outperformance to come close to 21%.

It’s a pretty safe bet that the fund’s investments will not return 21% this year (or most years).

It’s hard to imagine a scenario where Cornerstone Strategic Value Fund’s dividend doesn’t stop falling. Investors shouldn’t get too comfortable with its 20% yield.

Dividend Safety Rating: F