Although often overlooked by individual investors thirsty for yield, many closed-end funds (CEFs) have built notorious reputations for providing great returns to their holders.
A great way to start is evaluating a fund’s distribution history alongside its portfolio’s earnings — that will immediately give you a picture of a sponsor or board’s management practices. A look at a semiannual or annual report will reveals fine details such as undistributed net investment income (UNII), changes in portfolio holdings and prospects for dividend coverage.
The key to this strategy is to uncover and then focus on funds that use their leverage from borrowings productively, and avoid funds that have excessively high stated distribution policies. I prefer to own funds that pay a special dividend each year for the purpose of balancing tax liability because of an over-earning portfolio than a fund that struggles to make ends meet. It offers additional peace of mind to investors that a dividend cut isn’t looming, which in turn can cause erratic price volatility.
My top three funds include selections from managers that have long histories of generating excellent returns and providing their shareholders with a nice cushion of investment income in excess of distributions. Here they are: