Closed-End Funds: 5 CEFs Yielding 5%-Plus

When the Federal Reserve began its Taper Talk last year, it seemed that investors fled anything that was paying a high yield. From real estate investment trusts (REITs) to master limited partnerships (MLPs), any sector that has been a major source of income over the last few years was now considered dead money … even if the sector isn’t historically affected by rising interest rates.


All of this panic provides plenty of bargain shopping deals for those investors with more level heads. And in this case I’m talking about the often-ignored world of closed-end funds (CEFs).

Unlike exchange-traded funds (ETFs) and mutual funds — which have a creation and redemption mechanisms — CEFs trade on the equities markets with a fixed number of shares. After their IPO’s, CEFs can and often do trade for discounts to their net asset values (NAV), allowing investors to pick up stocks and bonds for pennies on the dollar.

For example, if a CEF is trading at a 10% discount to its NAV, you effectively get a dollar’s worth of assets for 90 cents. And given the Fed’s taper tantrum, many CEFs are now trading at huge discounts to their intrinsic values not seen since the depths of the credit crisis.

Perhaps more importantly for income seekers, due to the use of leverage, many CEFs pay above-average dividends — to the tune of 5 to 8%. Here are some of the best bargains in CEFs today.

MFS Multimarket Income Trust (MMT)

Discount to NAV: 11.96%
Distribution Yield: 6.76%

cefs-mmtBack in 1924, asset manager MFS debut the first mutual fund in the United States — Massachusetts Investors Trust (MITTX). Since then, MFS has built upon that legacy to include several highly ranked- mutual funds and CEFs.

That includes CEF stalwart the MFS Multimarket Income Trust (MMT).

The Morningstar bronze-rated fund’s portfolio is invested in wide range of different bonds varieties — from high-yield and emerging-market debt to investment-grade corporate debt and treasury bonds.

And MMT’s management has discretion on what to buy and when, making the CEF able to shift around its portfolio as needed. This attribute allowed MMT’s managers to stem losses in the crisis of 2008 by focusing on high-quality bonds.

Currently, the bulk of the portfolio is in corporate bonds (61% junk, 18% investment grade) and emerging market debt (21%).

MMT comes with a hefty 6.76% distribution yield and is currently trading for a nearly 12% discount to its underlying value. That’s well over the normal discount range for the fund.  Expenses for MMT run 1.00% — or $100 per $10,000 invested — per year.

BlackRock Corporate High Yield Fund (HYT)

cefs-hytDiscount to NAV: 7.11%
Distribution Yield: 7.86%

There’s no denying that BlackRock (BLK) is powerhouse when it comes to asset management. That fact extends into its CEF offerings as well. The asset manager recently merged several of its CEFs into one entity — the BlackRock Corporate High Yield Fund (HYT). The resulting new fund features a four-star and bronze rating from Morningstar.

Unlike MMT, HYT’s underlying portfolio strictly focuses on corporate bonds from lower -rated companies. While there is some leeway on what type of bonds it can choose from, HYT is very much a junk bond fund, and the bulk of its assets are in traditional high-yield bonds. Not that there’s anything wrong with that. HYT has managed to produce a 9.19% annual return since its inception in 2003.

Currently, HYT can be bought for a 7.11% discount to its NAV, and it comes with a solid 7.86% distribution yield.

ING Prime Rate Trust (PBR)

ING-pbrDiscount to NAV: 3.12%
Distribution Yield: 6.41%

The main reason why investors fled bounds during the taper tantrum is that bond prices have a negative correlation with rising interest rates. The ING Prime Rate Trust (PPR) avoids some of those problems.

PPR invests in what are called floating-rate bank loans or floaters. These styles of bank loans adjust rates every 30 to 90 days, making them quite attractive in rising rate environments. PPR’s portfolio also tends to focus on the senior tranches of these bank loans. Often they are tied to physical assets such as a pipeline, warehouses or other heavy equipment and provide seniority in instances of default or bankruptcy.

Founded in 1988, PPR has had a long operating history through a variety of credit cycles and has earned a silver rating from Morningstar.

Expenses are a bit on the high side — currently at 2.14%. However, that expense ratio does include fees tied to the fund’s use of leverage. PPR can be bought at a 3% discount to its underlying portfolio of loans, and it comes with a dividend yield of 6.41%.

Nuveen Municipal Value Fund

cefs-nuvDiscount to NAV: 2.69%
Distribution Yield: 4.73%

Everyone hates paying taxes. So when investors have the ability to get a 7.3% taxable-equivalent yield, they should jump at the opportunity. As one of the largest and oldest municipal CEFs, the Nuveen Municipal Value Fund (NUV) makes it possible.

Munis have been hit hard by the twin specters of rising rates and some high profile defaults. (Detroit, anyone?) As such, the sector has sold off in spades, leaving some pretty juicy discounts in the NAV department. Discounts like these haven’t really existed since the Fed lowered rates back in 2008.

And with taxes for many individuals most likely rising over the next few years, those discounts should begin to vanish. That makes NUV even more tantalizing.

NUV holds a variety of munis with the bulk of them in the investment grade categories and backed by real revenues. Those holdings have helped it earn a bronze rating. Expenses for NUV run a cheap 0.54% and shares trade for a 2.695 discount to its NAV.

PowerShares CEF Income Composite ETF

Average Discount to NAV: 7.35%
Distribution Yield: 8.3%

cefs-pcefGiven just how many tantalizing bargains there are in CEF land these days, investor’s may want to go wide a broader option. In this case, CEF’s exchange traded fund sisters have the answer.

The PowerShares CEF Income Composite ETF (PCEF) tracks 149 different CEFs in the taxable bond categories as well as CEFs utilizing an equity option writing strategy. That includes all the funds on this list, minus NUV. Basically, the ETF allows you to buy the bulk of the CEF universe with one ticker.

Part of PCEF’s screen process is focus on funds that trading for discounts to the NAVs. With that in mind, PCEFs underlying portfolio of funds is currently trading at an average discount to NAV of 7.35%. Meanwhile, PCEF kicks out a monster 8.3% monthly dividend.

The downside to PCEF is that it isn’t cheap. Expenses for the ETF run 1.73%. Plus as a fund of funds, you’re technically paying expenses for all the underlying CEFs it owns. That makes it one of the most expensive ETFs to add to a portfolio.

However, given the sheer number of CEFs and bargains it holds, investors may want to give PCEF a go.

Disclosure: Aaron Levitt may initiate a position in any one of the CEFs mentioned in this article within 72 hours.

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