Closed-end funds (CEFs) are often completely ignored by investors. Mutual funds and exchange-traded funds (ETFs) get all the love. That’s a shame — especially if you’re looking high income. CEFs have some inherent advantages when it comes to getting a high yield.
CEFs trade throughout the day on exchanges just like ETFs and represent baskets of stocks, bonds or other holdings. But the kicker here is that unlike ETFs — which feature a creation/redemption mechanism — closed-end funds issue a set number of shares when launched. The laws of supply and demand dictate what their value is. Essentially, this means you can buy $1 worth of stocks for, say, 95 cents or 90 cents.
That discount already helps boost CEFs’ yields.
CEFs also have the ability to use leverage to bolster distributions, which again makes them a great place to find high yield … and as an added bonus, many closed-end funds pay out their distributions on a monthly basis.
If you’re looking to add some extra oomph and income for your portfolio, you need to consider CEFs. Here are three closed-end funds with high yield.
Closed-End Funds (CEFs) for High Yield: John Hancock Tax-Advantaged Dividend Income Fund (HTD)
Discount To Net Asset Value (NAV): 4.9%
Distribution Yield: 6.7%
How would you like to get a nearly 7% dividend yield from common stocks? With CEFs you can, and the John Hancock Tax-Advantaged Dvd Incom Fd. (NYSE:HTD) is the perfect fund to score a high yield with.
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 CEF’s holdings are in utilities and financial stocks, with Kinder Morgan Inc (NYSE:KMI) and Wells Fargo & Co (NYSE:WFC) as some of HTD’s top stocks.
The key to HTD’s yield is a tad bit of leverage. That helps provide the boost. However, this isn’t a case of going crazy. The CEF’s managers keep the number in check and are investing in pretty boring securities. When you add in HTD’s nearly 5% discount to its actual value, you have a recipe for high-income success.
For investors, HTD is one example of where CEFs get it right.
Closed-End Funds for High Yield: BlackRock Corporate High Yield Fund, Inc.’s (HYT)
Discount To Net Asset Value (NAV): 9.4%
Distribution Yield: 7.6%
For investors looking for more from their corporate bond holdings, the BlackRock Corporate High Yield Fund Inc (NYSE:HYT) could be a great CEF choice.
HYT features a junk-bond-like yield of 7.6%. However, the Morningstar Bronze-rated fund has little-to-no junk bond exposure. How it gets its high yield is buying using leverage — pretty much a given in the world of CEFs — as well as straddling the line between investment and non-investment grades. These fallen angel bonds still provide safety but allow investors to pick up some extra yield over investment-grade bonds. That combined with the leverage gives HYT its high yield.
Also decreasing the risk is HYT’s huge base of holdings — currently at 1,226 different bonds. This helps prevent blow-ups. Even if top holdings Chesapeake Energy Corporation (NYSE:CHK) or Freeport-McMoRan Inc (NYSE:FCX) run into trouble, there are plenty of other bonds still producing cash flows.
HYT’s strategy on boosting its yield has worked pretty flawlessly over the long haul. Since its inception in 2003, the CEF has returned nearly 8.27% annually when looking at its market price. NAV gains were closer to 10%.
Closed-End Funds for High Yield: Voya Global Equity Dividend and Premium Opportunity Fund (IGD)
Discount To Net Asset Value (NAV): 10.76%
Distribution Yield: 10.4%
CEFs are a great way to get another source of high income- namely options. Writing covered calls or engaging in a buy-write strategy on staid dividend stocks can help boost income from those stocks further. But the hassles and skill to need to use options can be more than some investors can handle. The Voya Global Equity Div & Prm Oppty Fund (NYSE:IGD) does the work for you.
IGD goes long a basket of 80 to 130 global dividend stocks — stalwarts like MetLife Inc (NYSE:MET) and Citigroup Inc (NYSE:C) — and then will write covered calls on them to produce even more income. The CEF can also write those calls on various ETFs and indexes to either hedge volatility or boost its dividends further.
What investors get is a high — over 10% — current yield.
Now, the fund did have some NAV decay after the recession, but things have been pretty stable in recent years. And as for the “return of capital” in its distribution, don’t worry. That’s just how option income is taxed and isn’t the fund handing itself over to you.
For high dividends, CEFs can’t be beaten, and IGD offers one of the largest yields.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
