Tap Closed-End Funds, Leave Bonds Behind

by Lawrence Meyers | September 13, 2012 11:00 am

A couple of weeks ago, I lamented the state of bond yields[1] and said investors should seek out other forms of dividends and fixed income. Interest rates are expected to be incredibly low for quite some time, and that means bond yields that might normally be attractive, provide a nice fixed-income stream or offer a portfolio hedge just aren’t there anymore.

I’ve exited almost all of my bond investments, and I think you should follow suit.

So where are investors going to find yields to replace their bond portfolios? One option is closed-end funds. These are a cross between a public company and a mutual fund. The fund trades like a stock on the exchange, but its daily value is not necessarily going to trade at its exact net asset value like a mutual fund does. In some ways, it’s also like a private equity fund, in that the proceeds are used to purchase specific assets in a specific sector.

Where possible, you’ll want to buy a fund that is trading at a discount to its net asset value, so you aren’t overpaying for the assets the fund holds. Then again, if it has superior returns and pays a nice dividend, then it’s worth considering.

The other thing to be careful of is funds trading at massive discounts, because that might mean a fund has a very large holding of something that the market does not believe in as fervently as the fund manager, or it’s a foreign stock that investors know little about. As of this writing[2], equity-based closed end funds are averaging a 6.16% discount to NAV, bond funds are averaging a 1.61% premium, and all funds are averaging a 1.23% discount.

Some of the interesting closed-end fund plays I see right now include H&Q Life Sciences Investors (NYSE:HQL[3]). It trades at a 2.5% discount to NAV, pays a 10% annualized distribution and is loaded with solid names, including my favorite health care stock, Teva Pharamceutical Industries (NASDAQ:TEVA[4]), and others like Celgene (NASDAQ:CELG[5]).

I also like Cohen & Steers Quality Income Realty Fund (NYSE:RQI[6]). This fund family runs some terrific mutual funds. This CEF trades at a 1.78% discount to NAV, pays a 6.64% distribution yield, and is up 35% YTD. The fund holds the top names in the REIT world including Simon Property Group (NYSE:SPG[7]), Vornado Realty Trust (NYSE:VNO[8]) and Equity Residential (NYSE:EQR[9])

You can find a CEF for just about anything. I like the strategy of NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ[10]). It holds a bunch of dividend-paying large caps like Pfizer (NYSE:PFE[11]) and General Electric (NYSE:GE[12]), but also write call options against their positions. The result is a 4% discount to NAV and 10.47% distribution yield.

As of this writing, Lawrence Meyers[13] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[14], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at SeekingAlpha.com[15]. He also has written two books[16] and blogs about public policy[17], journalistic integrity[18], popular culture[19] and world affairs[20].

Endnotes:
  1. I lamented the state of bond yields: http://investorplace.com/2012/08/bonds-are-dead-long-live-preferred-stock/
  2. As of this writing: http://www.closed-endfunds.com/default.aspx
  3. HQL: http://studio-5.financialcontent.com/investplace/quote?Symbol=HQL
  4. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA
  5. CELG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CELG
  6. RQI: http://studio-5.financialcontent.com/investplace/quote?Symbol=RQI
  7. SPG: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPG
  8. VNO: http://studio-5.financialcontent.com/investplace/quote?Symbol=VNO
  9. EQR: http://studio-5.financialcontent.com/investplace/quote?Symbol=EQR
  10. NFJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFJ
  11. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  12. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  13. Lawrence Meyers: mailto:pdlcapital66@gmail.com
  14. PDL Capital, Inc.: http://www.pdlcapital.com/
  15. SeekingAlpha.com: http://seekingalpha.com/author/larry-meyers/articles
  16. written two books: http://www.investorplace.com/author/lawrence-meyers/
  17. public policy: http://biggovernment.com/author/lmeyers/
  18. journalistic integrity: http://bigjournalism.com/author/lmeyers/
  19. popular culture: http://bighollywood.breitbart.com/author/lmeyers/
  20. world affairs: http://bigpeace.com/author/lmeyers/

Source URL: http://investorplace.com/2012/09/tap-closed-end-funds-and-leave-bonds-behind-hql-rqi-nfj/
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