Putnam
Dividend
Income
Fund
ANNUAL REPORT
June 30, 1996
[LOGO: BOSTON * LONDON * TOKYO]
Fund highlights
* "Manager Jeanne Mockard has often aided [Putnam Dividend Income
Fund's] returns and minimized volatility by shifting into undervalued
sectors of the preferred market, and moving between fixed- and
adjustable-rate preferreds depending on their valuations."
-- Morningstar Closed-End Funds, February 9, 1996
CONTENTS
4 Report from Putnam Management
8 Fund performance summary
11 Portfolio holdings
15 Financial statements
[PHOTO OF GEORGE PUTNAM OMITTED]
(copyright) Karsh, Ottawa
From the Chairman
Dear Shareholder:
The fiscal year that ended on June 30, 1996, provided a study in
contrasts for Putnam Dividend Income Fund -- and the preferred stocks in
which it invests. Most preferreds did well in the falling interest-rate
environment of the fiscal year's first half, but the second half
presented more challenges as rates began to climb. Fund Manager Jeanne
Mockard made the most of the favorable market and took the challenges in
stride. When the books were closed, they showed another year of
respectable performance.
Anticipating the change in interest rates, Jeanne began moving the
portfolio away from types of preferred stocks that thrive in low
interest-rate environments but tend toward price volatility when rates
creep upward. Instead, she emphasized other varieties, such as
adjustable-rate preferreds, which offer greater price stability.
In the report that follows, Jeanne provides details of her strategy as
she reviews fiscal 1996 performance and offers some insights into
prospects for fiscal 1997.
Respectfully yours,
/S/George Putnam
George Putnam
Chairman of the Trustees
August 21, 1996
Report from the Fund Manager
Jeanne L. Mockard
The preferred stocks that predominate in Putnam Dividend Income Fund's
portfolio experienced both highs and lows during the 12 months ended
June 30, 1996. While the falling interest- rate environment of calendar
1995 boosted returns for certain types of preferred stocks, 1996 has
proved considerably more challenging for the securities that your fund
invests in. Even in this environment, we consider your fund's 7.58%
total return at net asset value and 3.51% at market price to be very
respectable. For performance over longer periods, please see page 8.
* RELATIVELY FLAT YIELD CURVE PROMPTS resumption of leverage
Throughout most of the fund's history, we have maintained a leverage
component in the portfolio by issuing preferred shares. This mean that
we are, in effect, borrowing money at low short-term rates, reinvesting
it at higher long-term rates, and using the resulting profits to enhance
the return to common shareholders. You may recall that we suspended the
use of leverage in December 1994, when the gap between short-term and
long-term interest rates narrowed substantially. However, because we
believed that the yield curve had steepened, we reintroduced leverage by
issuing $60 million of auction preferred shares in March 1996. With the
increased income generated from the reinvestment of the proceeds from
the preferred shares, Putnam Management reviewed the fund's dividend. As
a result, shortly after the fiscal year ended, the Trustees of your fund
approved a $0.005 per share increase in the fund's monthly distribution
from $0.0060 per share to $0.065 per share.
* PERPETUALS SEESAWED DURING THE PERIOD
During the first half of your fund's fiscal year, we increased the
weighting of fixed-rate perpetual preferred stocks in the portfolio and
decreased the adjustable-rate preferreds (ARPs). Technically, perpetual
preferreds are equity securities, but they behave more like fixed-income
investments because of their fixed dividend rates. Unlike bonds,
however, they have no maturity dates and are considered quite sensitive
to interest rates. Consequently they performed extremely well in 1995's
falling rate environment.
Your fund also benefited from high real yields during the first half of
its fiscal year. Real yields represent a bond's yield minus the
prevailing inflation rate. High real yields indicated relatively tame
inflation, which increased the appeal of both fixed-income securities
and perpetual preferred stocks. Consequently, your fund's positioning
proved rewarding as long-term rates declined in 1995.
During the second half of fiscal 1996, the fund operated in an
environment of rising interest rates and generally challenging
conditions for fixed-income investors. The bond market began calendar
1996 both overbought and overvalued -- primarily the result of
investors' reactions to the backdrop of benign inflation, slow economic
growth, and an easing Federal Reserve Board policy.
Interest rates rose dramatically in April 1996, bringing the 10-month
bond market rally to an abrupt halt. This rising rate environment also
was difficult for perpetual preferred stocks, whose interest-rate
sensitivity made them more vulnerable to price changes. When interest
rates rise, prices of perpetual preferreds decline. Thus, the size of
the fund's current allocation of these securities may prompt a raised
eyebrow or two in light of the rising rate environment. However, many of
the perpetual preferreds that the fund now holds were purchased at
particularly attractive prices -- the direct result of recent volatility
- -- which should help minimize any additional risk.
[GRAPHIC OF VERTICAL BAR CHART OMITTED: COMPARATIVE PORTFOLIO
COMPOSITION*]
12/31/95 6/30/96
------------------------
Perpetual preferreds 60.7% 61.2%
Adjustable-rate preferreds 10.4 21.7
Sinking-fund preferreds 15.5 8.0
Common stocks 7.9 4.4
Convertible securities 1.9 1.5
Cash and short-term securities 3.2 5.7
* Based on percentage of net assets as of 6/30/96.
Holdings will vary over time.
We also attempt to offset the perpetual's inclination toward price
volatility with positions in sinking-fund preferred stocks. These
securities contain provisions that require the issuing corporation to
retire portions of the outstanding issue each year after a call-
protected period of time. While these securities also carry no maturity
date, the sinking fund provides them with greater price stability than
that of perpetual preferreds.
* COLLARED ARPs PROVIDE THE BEST OF BOTH WORLDS
In a rising rate environment, the prices of adjustable-rate preferred
stocks tend to be even more stable than those of sinking-fund
preferreds. This is because ARPs pay dividends that are adjusted to
reflect changes in interest rates, causing their price movements to be
comparable with those of shorter-maturity bonds.
All ARPs carry specific coupon collars that mark off the high and low
limits above or below which their coupons reset. Once an ARP has reached
its lower coupon collar, its coupon income is locked in at that level
and the security becomes known as a collared ARP. We believe these
securities provide the best of both worlds. When interest rates are
falling, collared ARPs act much like perpetual preferreds. Conversely,
when rates rise, they offer some defensive characteristics because the
coupons will similarly move up, preserving the stock's value. At
period's end, approximately 21.7% of the fund's net assets was invested
in ARPs, roughly two thirds of which were collared ARPs.
* TREASURY PROPOSALS STALLED
As we reported in your fund's semiannual shareholder report, proposals
out of Washington called for the lowering of the dividend-received
deduction (DRD) to 50% from 70%. These proposals, which resulted in
short-term price volatility in the preferred market as your fund reached
its fiscal year midpoint in December 1995, were all but forgotten by the
end of fiscal 1996. Investors had reacted to the uncertainty introduced
by the proposals by bidding the prices of many preferreds downward to
approximate the levels at which they might trade should the DRD be
reduced. However, it seems that excitement over the presidential
election has stolen the spotlight from discussions about budget
proposals, and the market is not incorporating any change in its
valuation of the securities. We will continue to monitor the status of
the Treasury proposals and any effects they may have on the securities
your fund invests in.
[GRAPHIC CHART OMITTED: TOP TEN HOLDINGS*]
Top 10 Holdings*
McDermott Inc. Series B, $2.60, sinking-fund preferred
Petroleum services
Duke Power Co. Series W, $7.00, preferred
Electric utility
H.F. Ahmanson and Co. Series C, $2.10, dep. shares preferred
Savings and loan
Provident Companies, Inc. $2.025, dep. shares preferred
Life insurance
New York State Electric & Gas Corp. Series B, $1.36, adjustable-rate
pfd.
Gas and electric utilities
Chase Manhattan Corp. Series L, $5.502, adjustable-rate preferred
Banking
Georgia Power Co. Series 93-2, $1.318, adjustable-rate preferred
Electric utility
Baltimore Gas and Electric Co. $6.99, preferred
Gas and electric utilities
Puget Sound Power & Light Co. Series B, $1.525, adjustable-rate pfd.
Electric utility
Texas Utilities Electric Co. Series A, $6.50, adjustable-rate preferred
Electric utility
*These holdings represent 26.2% of the fund's net assets as of 6/30/96.
Holdings will vary over time.
Looking forward, we anticipate a less robust environment in the
preferred market for the remainder of calendar 1996. We believe the
yield curve will steepen and look for more opportunity for performance
in shorter-duration preferreds. We also anticipate continued strength in
the economy in the near term. Given such a scenario, we believe the fund
is strategically positioned to reward shareholders in the months ahead.
The views expressed here are exclusively those of Putnam Management.
They are not meant as investment advice. Although the described holdings
were viewed favorably as of 6/30/96, there is no guarantee the fund will
continue to hold these securities in the future.
Performance summary
Performance should always be considered in light of a fund's investment
strategy. Putnam Dividend Income Fund is designed for investors seeking
a high level of current income eligible for the dividends-received
deduction, consistent with preservation of capital.
This section provides, at a glance, information about your fund's
performance. Total return shows how the value of the fund's shares
changed over time, assuming you held the shares through the entire
period and reinvested all distributions in the fund.
TOTAL RETURN FOR PERIODS ENDED 6/30/96
(most recent calendar quarter)
Merrill Lynch
Perpetual
Market Preferred Consumer
NAV price Index Price Index
- -----------------------------------------------------------------------
1 year 7.58% 3.51% 7.78% 2.75%
- -----------------------------------------------------------------------
5 years 71.74 42.31 59.53 15.22
Annual average 11.42 7.31 9.79 2.87
- -----------------------------------------------------------------------
Life of fund
(since 9/28/89) 91.31 46.00 91.86 25.36
Annual average 10.07 5.76 10.14 3.40
- -----------------------------------------------------------------------
Performance data represent past results, and does not reflect future
performance. They do not take into account any adjustment for taxes
payable on reinvested distributions. Investment returns and principal
value will fluctuate so that an investor's shares, when sold, may be
worth more or less than their original cost.
COMPARATIVE BENCHMARKS
Merrill Lynch Perpetual Preferred Index is an unmanaged list of
perpetual preferred stocks that is commonly used as a general measure of
performance for the preferred-stock market. The index assumes
reinvestment of all distributions and does not take into account
brokerage commissions or other costs. The securities that make up the
fund's portfolio do not match those in the index.
Consumer Price Index (CPI) is a commonly used measure of inflation; it
does not represent an investment return.
PRICE AND DISTRIBUTION INFORMATION
12 months ended 6/30/96
- ------------------------------------------------------------------
Distributions (common shares) (number) 12
- ------------------------------------------------------------------
Income $0.720
- ------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------
Total $0.720
- ------------------------------------------------------------------
Preferred shares Series A
(600 shares)
- ------------------------------------------------------------------
Income $1,181.25
- ------------------------------------------------------------------
Capital gains --
- ------------------------------------------------------------------
Total $1,181.25
- ------------------------------------------------------------------
Share value (common shares): NAV Market price
- ------------------------------------------------------------------
6/30/95 $10.57 $9.250
- ------------------------------------------------------------------
6/30/96 10.54 8.875
- ------------------------------------------------------------------
Current return (common shares): NAV Market price
- ------------------------------------------------------------------
End of period
- ------------------------------------------------------------------
Current dividend rate1 6.83% 8.11%
- ------------------------------------------------------------------
Taxable equivalent2 9.40 11.17
- ------------------------------------------------------------------
1 Income portion of most recent distribution, annualized and divided
by NAV or market price at end of period.
2 Assumes a corporation taxed at the 35%, federal tax rate and that
100% of the fund's distributions qualify for the 70% corporate
dividends-received deduction for investors, investment income may
also be subject to the federal alternative minimum tax.
TERMS AND DEFINITIONS
Net asset value (NAV) is the value of all your fund's assets, minus any
liabilities, the liquidation preference and cumulative undeclared
dividends paid on the auction preferred shares, divided by the number of
outstanding common shares.
Market price is the current trading price of one share of the fund.
Market prices are set by transactions between buyers and sellers on the
New York Stock Exchange.
Report of independent accountants
For the fiscal year ended June 30, 1996
To the Trustees and Shareholders of
Putnam Dividend Income Fund
We have audited the accompanying statement of assets and liabilities of
Putnam Dividend Income Fund, including the portfolio of investments
owned, as of June 30, 1996, and the related statement of operations for
the year then ended, the statement of changes in net assets for each of
the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the fund's management.
Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of June 30, 1996 by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Putnam Dividend Income Fund as of June 30, 1996,
the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and
the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
August 12, 1996
<TABLE>
<CAPTION>
Portfolio of investments owned
June 30, 1996
Preferred Stocks (90.8%) *
NUMBER OF SHARES VALUE
<S> <C> <C> <C>
Automobiles (3.9%)
- -----------------------------------------------------------------------------------------------------------------
90,000 Ford Motor Co. Ser. B, $2.063, dep. shs. pfd. $2,430,000
65,500 General Motors Corp. Ser. B, $2.281, dep. shs. pfd. 1,727,563
93,822 General Motors Corp. Ser. G, $2.275, dep. shs. pfd. 2,568,377
------------
6,725,940
Banks (22.9%)
- -----------------------------------------------------------------------------------------------------------------
10,000 Ahmanson (H.F.) & Co. Ser. B, $2.40, dep. shs. pfd. 253,750
194,000 Ahmanson (H.F.) & Co. Ser. C, $2.10, dep. shs. pfd. 4,995,500
20,000 Bank of Boston Corp. Ser. E, $2.125, dep. shs. pfd. 512,500
30,000 BankAmerica Corp. Ser. B, $6.00, Adjustable Rate Preferred (ARP) 2,527,500
60,000 BankAmerica Corp. Ser. H, $2.25, pfd. 1,537,500
38,200 BankAmerica Corp. Ser. K, $2.094, pfd. 974,100
18,600 BankAmerica Corp. Ser. L, $2.04, dep. shs. pfd. 474,300
70,000 BankAmerica Corp. Ser. M, $1.969, dep. shs. pfd. 1,785,000
70,000 Bankers Trust New York Corp. Ser. Q, $1.471, ARP [TRIANGLE] 1,540,000
50,000 Chase Manhattan Corp. Ser. L, $5.502, ARP 4,500,000
41,100 Chase Manhattan Corp. Ser. C, $2.71, pfd. 1,217,588
19,000 Chase Manhattan Corp. Ser. B, $2.44, pfd. 527,250
41,800 Chase Manhattan Corp. Ser. M, $2.10, pfd. 1,076,350
85,000 Chase Manhattan Corp. Ser. F, $2.08, pfd. 2,167,500
79,400 Chase Manhattan Corp. Ser. I, $1.98, dep. shs. pfd. 1,985,000
10,000 Citicorp Ser. 8-B, $8.25, pfd. 978,750
13,000 Citicorp Ser. 3, $7.00, ARP 1,241,500
45,000 Citicorp Ser. 19, $7.00, ARP 1,012,500
29,800 Citicorp Ser. 2, $6.00, ARP 2,514,375
13,000 First Chicago NBD Corp. Ser. E, $2.113, dep. shs. pfd. 333,125
38,500 Fleet Financial Group, Inc. $2.325, dep. shs. pfd. 1,001,000
92,800 Fleet Financial Group, Inc. $2.338, dep. shs. pfd. 2,505,600
26,100 Great Western Financial Corp. $8.30, dep. shs. pfd. 675,338
40,000 Sumitomo Bank Ltd. Ser. A, $8.125, dep. shs. pfd. 990,000
19,570 U S Bancorp Ser. A, $2.031, pfd. 499,035
58,300 Wells Fargo & Co. Ser. F, $2.469, dep. shs. pfd. 1,501,225
24,000 Wells Fargo & Co. Ser. G, $2.25, dep. shs. pfd. 621,000
------------
39,947,286
Broadcasting (0.7%)
- -----------------------------------------------------------------------------------------------------------------
49,000 Newscorp Overseas Corp. Ser. A, $2.156, pfd. 1,194,375
Combined Utilities (12.9%)
- -----------------------------------------------------------------------------------------------------------------
23,900 Baltimore Gas & Electric Co. Ser. 93, $7.125, pfd. 2,354,150
40,000 Baltimore Gas & Electric Co. $6.99, pfd. 3,950,000
9,395 Baltimore Gas & Electric Co. Ser. 87, $6.75, pfd. 920,710
10,000 Baltimore Gas & Electric Co. Ser. 93, $6.70, pfd. 950,000
10,000 Cincinnati Gas & Electric Co. Sinking Fund $7.375, pfd. 990,000
75,610 Delmarva Power & Light Co. $1.938, pfd. 1,918,604
217,000 New York State Electric & Gas Corp. Ser. B, $1.36, ARP 4,638,375
25,000 Pacific Gas & Electric Co. $1.76, pfd. 606,250
6,750 Public Service Electric & Gas Co. $6.92, pfd. 666,563
19,000 Public Service Electric & Gas Co. Sinking Fund $7.44, pfd. 1,862,000
7,000 Public Service of Colorado $7.15, pfd. 668,500
14,000 San Diego Gas & Electric Co. $7.05, pfd. 350,000
67,000 San Diego Gas & Electric Co. $1.70, pfd. 1,616,375
10,000 Western Resources, Inc. Sinking Fund $8.50, pfd. 997,500
------------
22,489,027
Electric Utilities (29.0%)
- -----------------------------------------------------------------------------------------------------------------
20,000 Appalachian Power Co. $5.92, pfd. 1,957,500
50,000 Connecticut Light & Power Co. Sinking Fund Ser. 92, $3.615, pfd. 2,143,750
140,000 Detroit Edison Co. $1.938, dep. shs. pfd. 3,517,500
8,000 Duke Power Co. Ser. D, $7.85, pfd. 840,000
50,000 Duke Power Co. Ser. W, $7.00, pfd. 5,000,000
8,284 Entergy Arkansas, Inc. $8.52, pfd. 813,903
8,916 Entergy Gulf States Utilities, Inc. $7.56, pfd. 802,440
9,000 Entergy Louisiana, Inc. $7.00, pfd. 843,750
20,000 Florida Power & Light Co. Ser. S, $6.98, pfd. 1,980,000
50,000 Georgia Power Co. $1.988, pfd. 1,262,500
200,000 Georgia Power Co. Ser. 93-2, $1.318, ARP 4,350,000
11,000 Houston Light & Power Co. $8.12, pfd. 1,109,625
50,000 Long Island Lighting Co. Sinking Fund Ser. NN, $1.95, pfd. 900,000
20,000 Massachusetts Electric Co. $6.99, pfd. 1,970,000
20,000 Niagara Mohawk Power Corp. $2.375, pfd. 440,000
15,200 Niagara Mohawk Power Corp. Ser. A, $1.625, ARP 231,800
6,600 Northern States Power Co. Ser. A, $5.52, ARP 608,850
14,100 Northern States Power Co. Ser. B, $5.52, ARP 1,304,250
116,000 PSI Energy, Inc. $7.44, pfd. 2,958,000
13,300 PacifiCorp Sinking Fund $7.12, pfd. 1,326,675
5,000 Peco Energy $7.48, pfd. 495,000
6,637 Pennsylvania Power & Light Co. $6.75, pfd. 627,197
72,000 Puget Sound Power & Light Co. $1.969, pfd. 1,845,000
175,000 Puget Sound Power & Light Co. Ser. B, $1.525, ARP 3,937,500
21,400 Texas Utilities Electric Co. Ser. B, $7.00, ARP 1,979,500
40,000 Texas Utilities Electric Co. Ser. A, $6.50, ARP 3,700,000
10,000 Texas Utilities Electric Co. $6.375, ARP 976,250
75,580 Texas Utilities Electric Co. Ser. A, $1.875, dep. shs. pfd. 1,917,842
25,000 Texas Utilities Electric Co. Ser. B, $1.805, dep. shs. pfd. 628,125
------------
50,466,957
Finance (3.0%)
- -----------------------------------------------------------------------------------------------------------------
40,000 Bear Stearns & Co. Ser. A, $3.025, ARP 1,750,000
9,000 Bear Stearns & Co. Ser. B, $1.97, dep. shs. pfd. 222,750
99,669 Berkley (W.R.) Corp. Ser. A, $1.844, pfd. 2,429,432
27,352 Merrill Lynch & Co., Inc. Ser. A, $2.25, dep. shs. pfd. 772,694
------------
5,174,876
Financial Services (1.4%)
- -----------------------------------------------------------------------------------------------------------------
38,350 Household International Inc. Ser. 92-A, $2.063, dep. shs. pfd. 987,513
59,750 Household International Inc. Ser. 91-A, $0.95, dep. shs. pfd. 612,438
20,000 J.P. Morgan & Co. Inc. $3.125, dep. shs. pfd. 950,000
------------
2,549,951
Food Chains (0.8%)
- -----------------------------------------------------------------------------------------------------------------
54,900 McDonalds Corp. $1.93, dep. shs. pfd. 1,413,675
Forest Products (1.8%)
- -----------------------------------------------------------------------------------------------------------------
120,000 Boise Cascade Corp. Ser. F, $2.35, dep. shs. pfd. 3,090,000
Gas Utilities (0.7%)
- -----------------------------------------------------------------------------------------------------------------
36,200 Phillips Gas Co. Ser. A, $2.33, pfd. 950,250
9,360 Washington Natural Gas Co. Ser. III, $2.125, pfd. 235,170
------------
1,185,420
Health Care (0.6%)
- -----------------------------------------------------------------------------------------------------------------
1,000 Rhone Poulenc Rorer Ser. 3, $5.84, dep. shs. pfd. 1,002,500
Insurance (7.3%)
- -----------------------------------------------------------------------------------------------------------------
115,000 AON Corp. $2.00, pfd. 2,961,250
190,000 Provident Cos., Inc. $2.025, dep. shs. pfd. 4,845,000
9,000 SunAmerica Inc. Ser. C, $7.00, ARP 877,500
50,000 SunAmerica Inc. Ser. B, $2.313, pfd. 1,287,500
108,000 Travelers Group. Ser. D, $2.313, dep. shs. pfd. 2,794,500
------------
12,765,750
Oil Services (4.8%)
- -----------------------------------------------------------------------------------------------------------------
111,000 LASMO PLC ADS Ser. A, $2.50, pfd. 2,775,000
190,537 McDermott Inc. Sinking Fund Ser. B, $2.60, pfd. 5,644,655
------------
8,419,655
Paper (0.3%)
- -----------------------------------------------------------------------------------------------------------------
20,000 James River Corp. Ser. O, $2.063, dep. shs. pfd. 495,000
Water Utilities (0.7%)
- -----------------------------------------------------------------------------------------------------------------
12,000 United Water Resources, Inc. Ser. B, $7.625, pfd. 1,197,000
------------
Total Preferred Stocks (cost $161,003,420) $158,117,412
Common Stocks (4.4%) *
NUMBER OF SHARES VALUE
Combined Utilities (1.3%)
- -----------------------------------------------------------------------------------------------------------------
43,000 Pacific Gas & Electric Co. $999,750
56,000 Rochester Gas & Electric Corp. 1,204,000
------------
2,203,750
Electric Utilities (3.1%)
- -----------------------------------------------------------------------------------------------------------------
50,000 Entergy Corp. 1,418,750
60,000 Long Island Lighting Co. 1,005,000
19,100 Potomac Electric Power Co. 506,150
41,000 Public Service Enterprise Group, Inc. 1,122,375
34,000 Texas Utilities Electric Co. 1,453,500
------------
5,505,775
Total Common Stocks (cost $7,136,543) $7,709,525
Convertible Preferred Stocks (1.5%) *(cost $2,677,115)
NUMBER OF SHARES VALUE
- -----------------------------------------------------------------------------------------------------------------
109,270 Lehman Brothers Holding Inc. $1.955, cv. pfd. $2,622,480
Short-Term Investments (5.7%)(a )(cost $9,862,518)
PRINCIPAL AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------------
$9,858,000 Interest in $500,000,000 repurchase agreement dated June 28, 1996
with Lehman Brothers Inc. due July 1, 1996 with respect to various
U.S. Treasury obligations-maturity value of $9,862,518 for an effective
yield of 5.5% $9,862,518
- -----------------------------------------------------------------------------------------------------------------
Total Investments (cost $180,679,596)*** $178,311,935
- -----------------------------------------------------------------------------------------------------------------
* Percentages indicated are based on net assets of $174,063,938.
*** The aggregate identified cost on a tax basis is $180,721,912, resulting in gross unrealized appreciation
and depreciation of $2,069,321, and $4,479,298, respectively, or net unrealized depreciation of
$2,409,977.
[TRIANGLE] This entity provides sub-custodian services to the fund.
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of assets and liabilities
June 30, 1996
<S> <C>
Assets
- -------------------------------------------------------------------------------------------------
Investments in securities, at value (identified cost $180,679,596) (Note 1) $178,311,935
- -------------------------------------------------------------------------------------------------
Cash 174
- -------------------------------------------------------------------------------------------------
Dividends and other receivables 1,732,069
- -------------------------------------------------------------------------------------------------
Receivable for securities sold 2,220,000
- -------------------------------------------------------------------------------------------------
Total assets 182,264,178
- -------------------------------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------------------------------
Distributions payable to shareholders 649,240
- -------------------------------------------------------------------------------------------------
Payable for securities purchased 6,985,650
- -------------------------------------------------------------------------------------------------
Payable for compensation of Manager (Note 2) 325,537
- -------------------------------------------------------------------------------------------------
Payable for administrative services (Note 2) 2,057
- -------------------------------------------------------------------------------------------------
Payable for investor servicing and custodian fees (Note 2) 27,078
- -------------------------------------------------------------------------------------------------
Payable for offering expenses (Note 4) 200,000
- -------------------------------------------------------------------------------------------------
Other accrued expenses 10,678
- -------------------------------------------------------------------------------------------------
Total liabilities 8,200,240
- -------------------------------------------------------------------------------------------------
Net assets $174,063,938
Represented by
- -------------------------------------------------------------------------------------------------
Auction preferred shares (600 shares issued and outstanding at $100,000 per
share liquidation preference)(Note 4) $60,000,000
- -------------------------------------------------------------------------------------------------
Paid-in-capital -common shares without par value; unlimited shares authorized;
10,821,255 shares outstanding (Notes 1 and 4) 122,164,096
- -------------------------------------------------------------------------------------------------
Distributions in excess of net investment income (Note 1) (352,422)
- -------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (Note 1) (5,380,075)
- -------------------------------------------------------------------------------------------------
Net unrealized depreciation of investments (2,367,661)
- -------------------------------------------------------------------------------------------------
Net assets $174,063,938
Computation of net asset value:
- -------------------------------------------------------------------------------------------------
Auction preferred shares at liquidation preference $60,000,000
- -------------------------------------------------------------------------------------------------
Cumulative undeclared dividends on auction preferred shares 20,250
- -------------------------------------------------------------------------------------------------
Net assets allocated to auction preferred shares $60,020,250
- -------------------------------------------------------------------------------------------------
Net assets available to common shares $114,043,688
- -------------------------------------------------------------------------------------------------
Net asset value per common share ($114,043,688 divided by 10,821,255 shares) $10.54
- -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of operations
Year ended June 30, 1996
<S> <C>
Investment income:
- ---------------------------------------------------------------------------------------------
Dividends (net of foreign tax of $41,625) $9,606,462
- ---------------------------------------------------------------------------------------------
Interest 432,596
- ---------------------------------------------------------------------------------------------
Total investment income 10,039,058
Expenses:
- ---------------------------------------------------------------------------------------------
Compensation of Manager (Note 2) 999,011
- ---------------------------------------------------------------------------------------------
Investor servicing and custodian fees (Note 2) 139,346
- ---------------------------------------------------------------------------------------------
Compensation of Trustees (Note 2) 12,656
- ---------------------------------------------------------------------------------------------
Administrative services (Note 2) 8,290
- ---------------------------------------------------------------------------------------------
Reports to shareholders 57,449
- ---------------------------------------------------------------------------------------------
Registration fees 450
- ---------------------------------------------------------------------------------------------
Auditing 40,324
- ---------------------------------------------------------------------------------------------
Legal 7,954
- ---------------------------------------------------------------------------------------------
Postage 66,463
- ---------------------------------------------------------------------------------------------
Exchange listing fees 10,130
- ---------------------------------------------------------------------------------------------
Preferred share auction fees 66,086
- ---------------------------------------------------------------------------------------------
Other 4,120
- ---------------------------------------------------------------------------------------------
Total expenses 1,412,279
- ---------------------------------------------------------------------------------------------
Expense reduction (Note 2) (43,219)
- ---------------------------------------------------------------------------------------------
Net expenses 1,369,060
- ---------------------------------------------------------------------------------------------
Net investment income 8,669,998
- ---------------------------------------------------------------------------------------------
Net realized loss on investments (Notes 1 and 3) (1,398,610)
- ---------------------------------------------------------------------------------------------
Net unrealized appreciation on investments during the year 1,735,330
- ---------------------------------------------------------------------------------------------
Net gain on investments 336,720
- ---------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $9,006,718
- ---------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Statement of changes in net assets
Year ended June 30
--------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets
- ----------------------------------------------------------------------------------------------------------------
Operations:
- ----------------------------------------------------------------------------------------------------------------
Net investment income $8,669,998 $8,399,243
- ----------------------------------------------------------------------------------------------------------------
Net realized loss on investments (1,398,610) (3,908,559)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 1,735,330 4,004,697
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 9,006,718 8,495,381
- ----------------------------------------------------------------------------------------------------------------
Distributions to preferred shareholders:
- ----------------------------------------------------------------------------------------------------------------
From net investment income (708,750) (93,670)
From net realized gain on investments -- (635,190)
Net increase in net assets resulting from operations
applicable to common shareholders (excluding cumulative
undeclared dividends on auction preferred shares of $20,250
and $0, respectively) 8,297,968 7,766,521
- ----------------------------------------------------------------------------------------------------------------
Distributions to common shareholders:
- ----------------------------------------------------------------------------------------------------------------
From net investment income (7,791,339) (8,465,986)
From net realized gain on investments -- (2,571,785)
Increase (decrease) from capital share transactions (Note 4) 60,000,000 (25,000,000)
- ----------------------------------------------------------------------------------------------------------------
Auction preferred share offering costs (Note 4) (800,000) --
- ----------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets 59,706,629 (28,271,250)
- ----------------------------------------------------------------------------------------------------------------
Net assets
- ----------------------------------------------------------------------------------------------------------------
Beginning of year 114,357,309 142,628,559
- ----------------------------------------------------------------------------------------------------------------
End of year (including distributions in excess of net investment income of
$352,422 and $522,331, respectively) $174,063,938 $114,357,309
- ----------------------------------------------------------------------------------------------------------------
Number of fund shares
- ----------------------------------------------------------------------------------------------------------------
Common shares outstanding at beginning and end of year 10,821,255 10,821,255
- ----------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at beginning of year -- 250
- ----------------------------------------------------------------------------------------------------------------
Auction preferred shares repurchased -- (250)
- ----------------------------------------------------------------------------------------------------------------
Auction preferred shares issued 600 --
- ----------------------------------------------------------------------------------------------------------------
Auction preferred shares outstanding at end of year 600 --
- ----------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
(For a share outstanding throughout the period)
Year ended June 30
- -------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $10.57 $10.84 $12.39
- -------------------------------------------------------------------------------------------------------------------------------
Investment operations
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income .80 .78 1.13
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .03 .01 (1.13)
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment operations .83 .79 --
- -------------------------------------------------------------------------------------------------------------------------------
Less distributions:
- -------------------------------------------------------------------------------------------------------------------------------
From net investment income
- -------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders (.07) (.01) (.16)
- -------------------------------------------------------------------------------------------------------------------------------
To common shareholders (.72) (.78) (1.04)
- -------------------------------------------------------------------------------------------------------------------------------
From net realized gains --
- -------------------------------------------------------------------------------------------------------------------------------
To preferred shareholders -- (.06) --
- -------------------------------------------------------------------------------------------------------------------------------
To common shareholders -- (.24) (.38)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions (.79) (1.09) (1.58)
- -------------------------------------------------------------------------------------------------------------------------------
Auction preferred share offering cost (.07) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Change in cumulative undeclared dividends on auction preferred share -- .03 .03
- -------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $10.54 $10.57 $10.84
- -------------------------------------------------------------------------------------------------------------------------------
Market value, end of year (common shares) $8.875 $9.250 $9.750
- -------------------------------------------------------------------------------------------------------------------------------
Total investment return at market value (common shares) (%)(a) 3.51 5.82 (6.78)
- -------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (total fund) (in thousands) $174,064 $114,357 $142,629
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) (c) 1.23 1.07 1.42
- -------------------------------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 6.88 7.39 8.06
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 35.13 27.39 73.63
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Financial Highlights (continued)
(For a share outstanding throughout the period)
Year ended June 30
- ----------------------------------------------------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net asset value, beginning of year $11.38 $10.21
- ----------------------------------------------------------------------------------------------------------
Investment operations
- ----------------------------------------------------------------------------------------------------------
Net investment income 1.35 1.49
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments .97 1.15
- ----------------------------------------------------------------------------------------------------------
Total from investment operations 2.32 2.64
- ----------------------------------------------------------------------------------------------------------
Less distributions:
- ----------------------------------------------------------------------------------------------------------
From net investment income
- ----------------------------------------------------------------------------------------------------------
To preferred shareholders (.21) (.27)
- ----------------------------------------------------------------------------------------------------------
To common shareholders (1.08) (1.19)
- ----------------------------------------------------------------------------------------------------------
From net realized gains
- ----------------------------------------------------------------------------------------------------------
To preferred shareholders -- --
- ----------------------------------------------------------------------------------------------------------
To common shareholders -- --
- ----------------------------------------------------------------------------------------------------------
Total distributions (1.29) (1.46)
- ----------------------------------------------------------------------------------------------------------
Auction preferred share offering cost -- --
- ----------------------------------------------------------------------------------------------------------
Change in cumulative undeclared dividends on auction preferred shares (.02) (.01)
- ----------------------------------------------------------------------------------------------------------
Net asset value, end of year $12.39 $11.38
- ----------------------------------------------------------------------------------------------------------
Market value, end of year (common shares) $11.875 $12.000
- ----------------------------------------------------------------------------------------------------------
Total investment return at market value (common shares) (%)(a) 8.27 28.71
- ----------------------------------------------------------------------------------------------------------
Net assets, end of year (total fund) (in thousands) $208,076 $196,725
- ----------------------------------------------------------------------------------------------------------
Ratio of expenses to average net assets (%)(b) (c) 1.70 1.64
- ----------------------------------------------------------------------------------------------------------
Ratio of net investment income to average net assets (%)(b) 9.65 11.14
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover (%) 166.44 160.44
- ----------------------------------------------------------------------------------------------------------
(a) Total investment return assumes dividend reinvestment
and does not reflect the effect of sales charges.
(b) Ratios reflect net assets available to common shares only; net investment
income ratio also reflects reduction for dividend payments to preferred
shareholders.
(c) The ratio of expenses to average net assets for the year ended June 30, 1996
includes amounts paid through expense offset arrangements. Prior perid ratios exclude these
amounts. (Note 2)
</TABLE>
Notes to financial statements
June 30, 1996
Note 1
Significant accounting policies
The fund is registered under the Investment Company Act of 1940, as
amended, as a diversified, closed-end management investment company. The
fund's objective is to seek high current income eligible for dividends
received deduction allowed to corporations under Section 243 of the
Internal Revenue Code, consistent with preservation of capital by
investing in a portfolio of preferred and common equity securities. The
fund will invest at least 65% of its total assets in dividend-paying
securities. Preferred stocks will be rated "investment grade" at the
time of investment or, if not rated, will be of comparable quality as
determined by Putnam Investment Management, Inc. ("Putnam Management"),
the fund's Manager, a wholly-owned subsidiary of Putnam Investments,
Inc. The fund may also use leverage by issuing preferred shares in an
effort to increase the income to the common shares.
The following is a summary of significant accounting policies
consistently followed by the fund in the preparation of its financial
statements. The preparation of financial statements is in conformity
with generally accepted accounting principles and requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities. Actual results could differ from those
estimates.
A) Security valuation Investments for which market quotations are
readily available are stated at market value, which is determined using
the last reported sale price, or, if no sales are reported -- as in the
case of some securities traded over-the-counter--the last reported bid
price. Securities whose market quotations are not readily available are
stated at fair value on the basis of valuations furnished by pricing
services approved by the Trustees, which determine valuations for
normal, institutional-size trading units of such securities using
methods based on market transactions for comparable securities and
various relationships between securities that are generally recognized
by institutional traders. Short-term investments having remaining
maturities of 60 days or less are stated at amortized cost, which
approximates market value, and other investments are stated at fair
value following procedures approved by the Trustees.
B) Joint trading account Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the fund may transfer uninvested
cash balances into a joint trading account along with the cash of other
registered investment companies managed by Putnam Management and certain
other accounts. These balances may be invested in one or more repurchase
agreements and/or short-term money market instruments.
C) Repurchase agreements The fund, or any joint trading account, through
its custodian, receives delivery of the underlying securities, the
market value of which at the time of purchase is required to be in an
amount at least equal to the resale price, including accrued interest.
Putnam Management is responsible for determining that the value of these
underlying securities is at all times at least equal to the resale
price, including accrued interest.
D) Determination of net asset value Net asset value of the common shares
is determined by dividing the value of all assets of the fund (including
accrued interest and dividends), less all liabilities (including accrued
expenses), undeclared dividends on auction preferred shares and the
liquidation value of any outstanding auction preferred shares, by the
total number of common shares outstanding.
E) Security transactions and related investment income Security
transactions are accounted for on the trade date (date the order to buy
or sell is executed). Interest income is recorded on the accrual basis.
Dividend income is recorded on the ex-dividend date.
F) Federal taxes It is the policy of the fund to distribute all of its
taxable income within the prescribed time and otherwise comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies. It is also the intention of the fund to distribute
an amount sufficient to avoid imposition of any excise tax under Section
4982 of the Internal Revenue Code of 1986. Therefore, no provision has
been made for federal taxes on income, capital gains or unrealized
appreciation on securities held and for excise tax on income and capital
gains. At June 30, 1996, the fund had a capital loss carryover of
approximately $4,898,000 available to offset future net capital gain, if
any. The amount of the carryover and the expiration dates are:
Loss Carryover Expiration
-------------------- ----------------
$ 366,000 June 30, 2003
4,532,000 June 30, 2004
G) Distributions to shareholders Distributions to common and preferred
shareholders are recorded by the fund on the ex-dividend date. At
certain times, the fund may pay distributions at a level rate even
though, as a result of market conditions or investment decisions, the
fund may not achieve projected investment results for a given period.
Dividends on auction preferred shares become payable when, as and if
declared by the Trustees. Each dividend period for the auction preferred
shares is generally a 49 day period. The applicable dividend rate for
the auction preferred shares on June 30, 1996 was 4.031%. The amount and
character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. Reclassifications are made to the fund's
capital accounts to reflect income and gains available for distribution
(or available capital loss carryovers) under income tax regulations. For
the year ended June 30, 1996, there were no such reclassifications.
Note 2
Management fee, administrative services and other transactions
Compensation of Putnam Management, for management and investment
advisory services is paid quarterly based on the average net assets of
the fund. Such fee is based on the following annual rates: 0.75% of the
first $500 million of average net assets, 0.65% of the next $500
million, 0.60% of the next $500 million, and 0.55% of any amount over
$1.5 billion.
The fund reimburses Putnam Management for the compensation and related
expenses of certain officers of the fund and their staff who provide
administrative services to the fund. The aggregate amount of all such
reimbursements is determined annually by the Trustees.
Custodial functions for the fund's assets are provided by Putnam
Fiduciary Trust Company (PFTC), a wholly-owned subsidiary of Putnam
Investments, Inc. Investor servicing agent functions are provided by
Putnam Investor Services, a division of PFTC.
For the year ended June 30, 1996, fund expenses were reduced by $43,219
under expense offset arrangements with PFTC. Investor servicing and
custodian fees reported in the Statement of operations exclude these
credits. The fund could have invested a portion of the assets utilized
in connection with the expense offset arrangements in an income
producing asset if it had not entered into such arrangements.
Trustees of the fund receive an annual Trustees fee of $800 and an
additional fee for each Trustee's meeting attended. Trustees who are not
interested persons of Putnam Management and who serve on committees of
the Trustees receive additional fees for attendance at certain committee
meetings.
The fund adopted a Trustee Fee Deferral Plan (the "Plan") which allows
the Trustees to defer the receipt of all or a portion of Trustees Fees
payable on or after July 1, 1995. The deferred fees remain in the fund
and invested in the fund or in other Putnam funds until distribution in
accordance with the Plan.
Note 3
Purchase and sales of securities
During the year ended June 30, 1996, purchases and sales of investment
securities other than short-term investments aggregated $105,495,248 and
$44,350,627, respectively. There were no purchases and sales of U.S.
government obligations. In determining the net gain or loss on
securities sold, the cost of securities has been determined on the
identified cost basis.
Note 4
Auctioned preferred shares
On March 14, 1996, the fund issued 600 Auctioned Preferred Shares.
Proceeds to the fund, before underwriting expenses of $600,000 and
offering expenses of $200,000, amounted to $60,000,000. Such offering
expenses were paid initially by Putnam Management, and the fund will
reimburse Putnam Management for all such costs. These expenses were
charged against net assets of the fund available to common shareholders.
The shares are redeemable at the option of the fund on any dividend
payment date at a redemption price of $100,000 per share, plus an amount
equal to any dividends accumulated on a daily basis but unpaid through
the redemption date (whether or not such dividends have been declared)
and, in certain circumstances, a call premium.
It is anticipated that dividends paid to holders of auction preferred
shares will be considered tax-exempt dividends under the Internal
Revenue Code of 1986. To the extent that the fund earns taxable income
and capital gains by the conclusion of a fiscal year, it will be
required to apportion to the holders of the auction preferred shares
throughout that year additional dividends as necessary to result in an
after-tax equivalent to the applicable dividend rate for the period.
Under the Investment Company Act of 1940, the fund is required to
maintain asset coverage of at least 200% with respect to the auction
preferred shares as of the last business day of each month in which any
such shares are outstanding. Additionally, the fund is required to meet
more stringent asset coverage requirements under terms of the auction
preferred shares and the shares' rating agencies. Should these
requirements not be met, or should dividends accrued on the auction
preferred shares not be paid, the fund may be restricted in its ability
to declare dividends to common shareholders or may be required to redeem
certain of the auction preferred shares. At June 30, 1996, no such
restrictions have been placed on the fund.
<TABLE>
<CAPTION>
Selected Quarterly Data
(Unaudited)
Available for
common shareholders
Net realized and
Investment Net investment unrealized gain Net increase in net
income income* (loss) on investments* assets from operations*
- --------------------------------------------------------------------------------------------------------
Quarter Per Per Per Per
Ended Total Share Total Share Total Share Total Share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
9/30/94 $2,647,044 $.24 $2,281,816 $.21 ($1,372,663) ($.12) $909,153 $.09
12/31/94 2,480,140 .23 2,149,522 .20 (5,514,255) (.51) (3,364,733) (.31)
3/31/95 2,264,210 .21 2,003,551 .19 3,980,750 .36 5,984,301 .55
6/30/95 2,216,738 .21 1,931,367 .18 3,002,306 .28 4,933,673 .46
9/30/95 2,189,958 .20 1,904,327 .18 2,375,048 .21 4,279,375 .39
12/31/95 2,309,740 .22 2,037,494 .19 (147,990) (.01) 1,889,504 .18
3/31/96 2,395,391 .22 1,942,554 .18 (1,253,163) (.12) 689,391 .06
6/30/96 3,143,969 .29 2,056,623 .18 (637,175) (.05) 1,419,448 .13
*Available to common shareholders.
</TABLE>
Dividend Policy
It is the fund's dividend policy to pay monthly distributions from net
investment income and any net realized short-term gains (including gains
from options and futures transactions). Long-term capital gains are
distributed at least annually. In an effort to maintain a more stable
level of distributions, the fund's monthly distribution rate will be
based on Putnam Management's projections of the net investment income
and net realized short-term capital gains that the fund is likely to
earn over the long term. Such distributions at times may exceed the
current earnings of the fund, resulting in a nontaxable return of
capital to shareholders.
These estimates are subject to adjustment depending on investment
results for the fund's entire fiscal year. Final information regarding
such matters is furnished to shareholders in the fund's annual reports
and in tax information provided following the end of each calendar year.
Federal tax information
(Unaudited)
The fund has designated 100% of the distributions from net investment
income as qualifying for the dividends received deduction for
corporations.
The Form 1099 you receive in January 1997 will show the tax status of
all distributions paid to your account in calendar 1996.
Results of June 6, 1996 shareholder meeting
(Unaudited)
An annual meeting of shareholders of the fund was held on June 6, 1996.
At the meeting, each of the nominees for Trustees was elected, as
follows:
Votes for Votes withheld
- ---------------------------------------------------------------
Jameson Adkins Baxter 9,815,070 226,243
Hans H. Estin 9,813,741 227,572
John A. Hill 9,815,822 225,491
Elizabeth T. Kennan 9,812,805 228,509
Lawrence J. Lasser 9,816,268 225,046
Robert E. Patterson 9,817,411 223,903
Donald S. Perkins 9,814,285 227,028
William F. Pounds 9,816,646 224,668
George Putnam 9,815,515 225,799
George Putnam, III 9,811,842 229,471
E. Shapiro 9,804,211 237,102
A.J.C. Smith 9,813,671 227,642
W. Nicholas Thorndike 9,398,974 642,339
A proposal to ratify the selection of Coopers & Lybrand L.L.P. as
independent auditors for the fund was approved as follows: 9,359,867
votes for, and 473,133 votes against, with 208,313 abstentions and
broker non-votes. A proposal to amend the fund's fundamental investment
restriction with respect to owning 10% of the voting securities of a
single issuer received the following votes: 5,085,156 votes for, and
1,251,830 votes against, with 316,593 abstentions. A proposal to amend
the fund's fundamental investment restriction with respect to making
loans through repurchase agreements and securities received the
following votes: 4,995,711 votes for, and 1,332,068 votes against, with
325,800 abstentions. A proposal to eliminate the fund's fundamental
investment restriction with respect to investments in securities of
issuers in which management of the fund or Putnam Investment Management,
Inc. owns securities received the following votes: 5,010,850 votes for,
and 1,321,871 votes against, with 320,858 abstentions. A proposal to
eliminate the fund's fundamental investment restriction with respect to
margin transactions received the following votes: 4,741,627 votes for,
and 1,602,857 votes against, with 309,096 abstentions. A proposal to
eliminate the fund's fundamental investment restriction with respect to
short sales received the following votes: 4,825,515 votes for, and
1,515,398 votes against, with 312,666 abstentions. A proposal to
eliminate the fund's fundamental investment restriction which limits the
fund's ability to pledge assets received the following votes: 4,758,291
votes for, and 1,556,892 votes against, with 338,396 abstentions. A
proposal to eliminate the fund's fundamental investment restriction
relating to oil, gas and mineral leases received the following votes:
5,003,519 votes for, and 1,315,946 votes against, with 334,115
abstentions. A proposal to eliminate the fund's fundamental investment
restriction relating to investing to gain control of a company's
management received the following votes: 5,071,319 votes for, and
1,300,956 votes against, with 281,305 abstentions. All tabulations have
been rounded to the nearest whole number. All proposals to change
investment policies failed to receive sufficient affirmative votes.
TRUSTEES CONSIDER TENDER OFFER OF SHARES
The prospectus issued in the public offering of the fund's shares
provided that the Trustees would consider whether to have the fund make
a tender offer if, in the last 12 weeks of its fiscal year, the fund's
shares trade at an average week-end discount to net asset value of more
than 10%. In the 12 week period ended June 30, 1996, the fund traded at
an average discount of 14.47%. Accordingly, the Trustees, at a series of
meetings held June and July of this year, considered whether such a
tender offer would be in the best interest of shareholders. In light of
the modest size of the fund ($174 million as of June 30, 1996), the
recent issue of preferred shares, and the risk that expense ratios would
increase if a tender offer were made, the cost and expense of a tender
offer and the lack of benefits to shareholders remaining in the fund
after completion of the offer, the Trustees decided that making a tender
offer would not currently be in the best interest of shareholders.
Fund information
INVESTMENT MANAGER
Putnam Investment
Management, Inc.
One Post Office Square
Boston, MA 02109
MARKETING SERVICES
Putnam Mutual Funds Corp.
One Post Office Square
Boston, MA 02109
CUSTODIAN
Putnam Fiduciary Trust Company
LEGAL COUNSEL
Ropes & Gray
INDEPENDENT
ACCOUNTANTS
Coopers & Lybrand L.L.P.
TRUSTEES
George Putnam, Chairman
William F. Pounds, Vice Chairman
Jameson Adkins Baxter
Hans H. Estin
John A. Hill
Ronald J. Jackson
Elizabeth T. Kennan
Lawrence J. Lasser
Robert E. Patterson
Donald S. Perkins
George Putnam, III
Eli Shapiro
A.J.C. Smith
W. Nicholas Thorndike
OFFICERS
George Putnam
President
Charles E. Porter
Executive Vice President
Patricia C. Flaherty
Senior Vice President
John D. Hughes
Senior Vice President and Treasurer
Lawrence J. Lasser
Vice President
Gordon H. Silver
Vice President
Peter Carman
Vice President
Brett Browchuk
Vice President
Thomas Reilly
Vice President
Jeanne L. Mockard
Vice President and Fund Manager
William N. Shiebler
Vice President
John R. Verani
Vice President
Paul M. O'Neil
Vice President
Beverly Marcus
Clerk and Assistant Treasurer
Call 1-800-225-1581 weekdays from 9 a.m. to 5 p.m. Eastern Time for up-
to-date information about the fund's NAV.
PUTNAM INVESTMENTS
The Putnam Funds
One Post Office Square
Boston, Massachusetts 02109
- ------------------
Bulk Rate
U.S. Postage
PAID
Putnam
Investments
- ------------------
26303-056 8/96
