3 Bulletproof Closed-End Funds for Retirement

Thanks to the many innovations in financial securities over the past several years, retirement investors now have far more choices for their investment dollars than they used to. Closed-end funds are a brilliant invention that takes the concept of a mutual fund one step further, but unlike a mutual fund, CEFs are capitalized and trade like stocks.

Bulletproof Closed-End Funds for Retirement

The managers of closed-end funds raise a fixed amount of capital by way of an initial public offering. That money is then invested in a selection of securities, although most CEFs concentrate in a particular type of investment.

A mutual fund has no limit to the number of shares it has because the managers create new shares as needed.

Whereas investors share in the cost of the fund, with CEFs, investors simply pay commissions when they trade the security. Retirement investors should like these choices of closed-end funds for yield and safety.

Closed-End Funds for Retirement: Nuveen Quality Preferred Income Fund (JTP)

Closed-End Funds for Retirement: Nuveen Quality Preferred Income Fund (JTP)Distribution Yield: 8.92%
Expense Ratio: 1.69%

Nuveen Quality Preferred Income Fund (JTP) invests 80% of its assets in preferred stocks, and up to 20% in other debt securities. I love preferred stocks because they themselves tend to stay in a pretty tight trading range, offer enhanced yields and provide great portfolio stability.

For a preferred stock to blow up, the underlying company itself has to be in major trouble — that means not paying its debt, leaving its preferred dividends in jeopardy. However, if you or closed-end funds are investing in any security with a questionable ability to meet debt-service, then something is wrong with the selection criteria in the first place.

The market seems to miss the value in JTP, because it trades at a 7% discount to NAV, while yielding 7.96% for income and has a total distribution yield of 8.92%.

It’s a bit pricey with an expense ratio of 1.69%, but that’s what you pay for safety and a high yield.

Closed-End Funds for Retirement: BlackRock Defined Opportunity Credit Trust (BHL)

Closed-End Funds for Retirement: BlackRock Defined Opportunity Credit Trust (BHL)Distribution Rate: 6.77%
Expense Ratio: 2.01%

If you’re looking for a diversified CEF in the debt arena, consider BlackRock Defined Opportunity Credit Trust (BHL).

Rather than just drop your money in an exchange-traded fund that only invests in bonds, BHL invests 80% of its assets in a mix of credit securities. The safest (and lowest-yielding) are senior secured floating rate and fixed rate loans, so the fund is in first position for debt repayment.

It also invests in second lien, subordinated or unsecured floating rate and fixed rate loans or debt. These are riskier because they are not in first position, or they may not have collateral behind them. It’s likely, however, that the assets generate high and regular cash flow over a fairly long period to establish their creditworthiness. These can yield 9% to 14%.

Investment grade corporate bonds are also in there, as well as some junk bonds.

This fund has an income yield of 4.65% and distribution yield of 6.77%.

Closed-End Funds for Retirement: Pimco Municipal Income Fund (PMF)

Closed-End Funds for Retirement: Pimco Municipal Income Fund (PMF)Distribution Yield: 7.38%
Expense Ratio: 1.32%

If you want to go more conservative, look at Pimco Municipal Income Fund (PMF). As far as closed-end funds go, this is pretty conservative. The fund invests in state general obligation bonds and guaranteed bonds of other municipalities.

This is important, because state general obligation bonds are backed by the municipality itself. That may not seem like much to hang one’s hat on, but the fact is that this means the state is committing all of its resources to pay these bonds off, no matter what.

In other words, the taxing authority is what backs up these bonds, which is far better than revenue bonds. Those get repaid with revenue from a specific project, like parking lots.

The distribution yield is 7.38%.

Extra bonus — most CEFs pay dividends on a monthly basis.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

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