With the Federal Reserve still keeping interest rates at near zero and the rest of the world’s central banks actually having negative yields, many traditional fixed income assets aren’t cutting it. CD’s are paying nothing, Treasuries are paying around 1.5% and even dividend stocks are yielding less than historical norms. That’s a big problem for today’s income seekers.
But you know what is still paying decent yields? Closed-end funds (CEFs).
CEFS are an often-ignored fund type that could just save your income portfolio. Closed-end funds trade throughout the day on exchanges just like exchange-traded funds and represent baskets of stocks, bonds or other holdings.
But the kicker here is that unlike ETFs, which have a creation/redemption mechanism, closed-end funds issue a set number of shares when IPO’d. That fact means that CEFs are dictated by the laws of supply and demand. Their “value” is determined by what investors want them and when. What that really means is that you can often buy a $1 worth of stocks or bonds for just pennies on the dollar.
Aside from this built-in value, many CEFs use leverage to help juice their returns. That means they yield more than a comparable basket of bonds or stocks. That high yield is further increased by the fact that you can buy them at discounts to their real values.
All in all, the combination of two factors makes them an ideal way to boost your income. With that in mind, here are three CEFs that can be had for big yields and big discounts to their real values.
CEFs With Big Yields: BlackRock Multi-Sector Income Trust (BIT)
Discount To Net Asset Value (NAV): 9.5%
Distribution Rate: 8.2%
For those investors looking for a “go-anywhere” bond option, the BlackRock Multi-Sector Income Trust (BIT) makes an ideal CEF to buy — especially considering its high dividend yield of 8.25%.
As a multisector or go-anywhere bond CEF, BIT’s managers have the ability to look pretty much anywhere for income opportunities. That can include asset-backed securities, bank loans, treasury bonds, corporate bonds and even emerging market debt. And the fund does make use of all of these fixed income types — spreading its $700 million in assets among over 900 different bonds. However, much of its portfolio — about 60% — is currently in junk bonds and asset-backed securities.
That multi-bond-style portfolio has benefited the fund in terms of performance in addition to providing a high income. BlackRock’s mangers at BIT have a done a good job at growing the CEFs underlying NAV and fund has had decent total returns when looking at its market price. That strong performance has helped it score a four star rating from Morningstar.
Expenses run at just 2.09%, which may seem high, but for CEFs it’s actually kind of low and includes expenses related to the fund leverage costs.
At the end of the day, BIT makes an ideal core income option for investors looking to get their feet wet in CEFs.
CEFs With Big Yields: John Hancock Tax Advantaged Dividend Income Fund (HTD)
Discount To NAV: 8.9%
Distribution Rate: 5.9%
With so many investors clamoring for yield, dividend stocks have risen hard. Today, prices for many dividend stocks are above historical norms and yields have been driven down. CEFs can provide a great way to get your dividend stock fix at a discount.
The John Hancock Tax Advantaged Dividend Income Fund (HTD) is such a fund. HTD invests in a portfolio of dividend-paying common and preferred securities domiciled in the United States.
As the name suggests, HTD is managed in a tax-advantaged way. The fund will only buy stocks whose dividends qualify for the lower dividend tax rate. So no REITs or MLPs. The fund also tends to buy and hold investments for many years to help reduce capital gains taxes.
The vast bulk of the CEFs holdings are in utilities and financial stocks. Top holdings include Spectra Energy Corp. (SE), Wells Fargo & Co (WFC) and Kinder Morgan Inc (KMI). However, none of the CEFs holdings account for more than 3% of its portfolio. There’s plenty of diversification here.
The focus on boring utilities hasn’t stopped the fund from performing well either. HTD has managed to grow its NAV at 12% on average, over the last 10 years. Its market price has grown by even more.
Combined with its big 5.59% yield and nearly 9% discount to NAV, HTD could be one of the best long-term ways for investors to get their stock dividend fixes.
CEFs With Big Yields: Nuveen AMT-Free Municipal Income Fund (NEA)
Discount To NAV: 5%
Distribution Rate: 5%
Let’s face facts, it doesn’t matter who wins the upcoming presidential election — odds are your taxes are going to go up. Which is why municipal bonds still make a lot of sense for investors. Getting any sort of a dividend that is tax-free is going to be key. And there are more CEFs in the muni sector than any other bond sector combined.
A great one is the Nuveen AMT-Free Municipal Income Fund (NEA).
NEA is a national muni fund and will own bonds from a variety of states, local governments and other agencies. In addition, the CEF will only invest in those muni bonds that are considered alternative minimum tax (AMT) free. Meaning, you can own the fund and not worry about getting snagged by the AMT hassles. The CEF’s managers hunt for those bonds that are currently trading for discounts.
The real win for NEA is that it currently trades for a 5% to its NAV. Investors are getting value on top of value. The discount allows for the muni fund to yield 4.96%. And while that may not seem that high, that yield is tax free. Someone in the top tax bracket would have to earn an 8.76% yield to get the same amount of income post-taxes.
With its low CEF expense ratio of 1.46%, NEA makes an ideal choice for investors looking for a tax-free yield.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.