Dis­counted Closed-ends with de­li­cious Yields

Forbes - - Investing -

Find­ing in­come from all the right places to­day re­quires a wider net than ever be­fore. One sec­tor of­ten over­looked by in­di­vid­ual in­vestors is closed- end funds (CEFS). Such funds nor­mally trade at an av­er­age dis­count of about –7% to their net as­set value (NAV), but th­ese bas­kets of trad­able se­cu­ri­ties never fully re­cov­ered from the Septem­ber mar­ket drop. Dis­counts are now as high as 18%.

There are a couple of rea­sons for this di­ver­gence from NAV other than un­der­ly­ing fun­da­men­tals. First, closed- end funds have no nat­u­ral au­di­ence of in­vestors and few an­a­lysts opin­ing on their per­for­mance or out­look. Hence their re­cov­ery from a mar­ket- driven cor­rec­tion will be slower, since they are on fewer radar screens.

A sec­ond rea­son, I sus­pect, is that CEFS tend to be held by in­di­vid­u­als, and many sold in Septem­ber for tax rea­sons. Their idea is to buy the shares back af­ter 30 days to avoid run­ning afoul of the wash sale rules. Oth­ers are wait­ing for the De­cem­ber quar­terly ex­div­i­dend date to pass. Since such dis­tri­bu­tions come out of NAV, the think­ing is that the price will drop by the amount of the dis­tri­bu­tion. In my ex­pe­ri­ence this price de­cline sel­dom oc­curs.

What makes CEFS par­tic­u­larly at­trac­tive this year is that the end div­i­dends typ­i­cally fea­ture a mix of earned and ac­crued in­ter­est, div­i­dends, op­tion trad­ing gains and earned cap­i­tal gains. When a fund runs through all th­ese, it can choose to sus­tain its div­i­dend pay­out rate through a dis­tri­bu­tion paid in cap­i­tal. When that hap­pens, you want to head for the exit.

Here are a few of my fa­vorite closed- end funds. For pre­ferred stock CEFS I like

which yields 8.54% with a price vari­ance of –10% from NAV ver­sus a nor­mal –7.9% dis­count. The fund is chock-full of the pre­ferreds of big banks, in­sur­ance com­pa­nies and util­i­ties, and the price here should re­act to a Fed rate bump, pos­si­bly making them an even bet­ter buy. For in­dus­trial CEFS look at

yield­ing 11.6% with an NAV dis­count of –15.2% ver­sus a nor­mal –11.4%. Voya’s hold­ings are a trea­sure trove of multi­na­tional blue- chip stocks, in­clud­ing Gen­eral Dy­nam­ics, Siemens AG, Lock­heed, Gen­eral Elec­tric and BHP Bil­li­ton. For an in­fra­struc­ture play I like

yield­ing 8.43% with an NAV dis­count of –15.7% ver­sus a nor­mal –14.1%. The fund, which has $2.8 bil­lion in as­sets, is heav­ily weighted in reg­u­lated and in­te­grated util­i­ties, among them PG&E Corp., Nex­tera En­ergy, CMS En­ergy and the U.K.’S Na­tional Grid Plc.

Fi­nally, for a fund in­vest­ing in mid­stream MLPS look at

yield­ing a whop­ping 16.57% with a price dis­count of –8.8% ver­sus a nor­mal pre­mium of 8.1%. MLPS such as Kayne, which holds big-pipe­line MLPS in its port­fo­lio like Kinder Mor­gan, Plains All Amer­i­can and En­ter­prise Prod­ucts Part­ners, are some of the most un­der­priced buys in the mar­ket be­cause of oil’s woes.

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