Closed-end funds, or CEFs, are another innovation in tradable securities that have popped up in recent years. CEFs are somewhat similar to mutual funds or exchange-traded funds, but have a few important differences. Unlike those other two investments, CEFs raise capital by going public in an IPO, and then invest that capital according to its prospectus. Usually, the portfolio is highly targeted by the investment manager, and its price will move just as the price of a stock does.
I expect to have a few CEFs as part of my forthcoming stock advisory newsletter, The Liberty Portfolio.
Like similar pooled investments, the value of even the best CEFs is expressed as “net asset value”, or NAV. However, because CEFs trade according to typical market forces of supply and demand, sometimes the best CEFs could end up trading at premiums or discounts to the underlying NAV. This often is an indicator of investor sentiment towards the sector.
The best CEFs may be trading at a discount and can also represent value, thus they give investors a chance to find some growth with their capital, as well as the high dividends. With that in mind, the following are the best CEFs for growth and dividends.
Best CEFs to Buy: Nuveen Diversified Dividend & Income Fd. (JDD)
Nuveen Diversified Dividend & Income Fd. (NYSE:JDD) is an intriguing play. It balances debt and equity, with the goal of blunting U.S. interest rate sensitivity and it delivers a high yield.
The asset allocation is quite diversified, which is one reason I like it. It holds about 29% common dividend stocks, 40% real estate investment trusts, about 32% in variable rate senior loan interests, 36% in emerging market debt and foreign corporate bonds, and a smattering of other securities.
You may have noticed that comes to more than 100%. That’s because it is slightly leveraged, so it carries more risk than most CEFs, which are not leveraged. The amount of leverage is relatively small, though, at 30%. I would be suspect of the leverage if the money were thrown entirely into a non-diversified, high-risk equity basket. But that’s not the case, so modest leverage to buy senior loan interests in acceptable.
It also yields about 9.1% and trades at about an 6% discount to NAV.
Best CEFs to Buy: Diversified Real Asset Income Fund of Beneficial Interest (DRA)
To me, the best CEFs offer diversified income across many different types of securities, especially ones that the average investor can’t purchase — things like participation interests in loans — and that own things like preferred stocks.
Thus, Diversified Real Asset Income Fund of Beneficial Interest (NYSE:DRA), from Nuveen, is one such way to go.
I like the diversification and the sectors it focuses on. About a third of the portfolio is allocated to equity REITs, 16% to electric utilities, 11% to energy, 10% to multi-utilities and roughly 5% to diversified financial services.
Mind you, that’s not just equities. It’s nearly 40% equities, 32% preferred, 14% corporate bonds, and the rest is a mash of those other assets that are hard to purchase. More than a third of the 305 holdings are foreign, the average coupon pays 6.3%, and the fund grabbed bonds trading at 80% of par.
It pays an 8.3% yield, and trades at a 10% discount to par. It is also leveraged to the tune of about 30%.
Best CEFs to Buy: Alpine Total Dynamic Dividend Fund (AOD)
Finally, if you’re looking for closed-end funds that are just on the hunt for dividends no matter where they may reside, consider Alpine Total Dynamic Dividend Fund (NYSE:AOD).
I like to think of this as a “bounty hunter”, as the fund seeks out companies all over the world that not only pay dividends, but seem likely to increase their payout.
AOD does engage in a dividend rotation strategy which previously meant a ton of turnover, but new management came in a few years ago and curtailed that strategy.
AOD is nicely diversified, with financials at 18%, industrials at 14%, IT accounting for 12.5%, health care at 11% and consumer discretionary at 10%. Six other sectors are represented, and more than 35% of the portfolio is spread across numerous countries.
AOD pays about 8.8% and trades at a 15% NAV discount.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.