When I penned this column after the closing bell Wednesday, the S&P 500 Index was down 5% for the year. But not everybody lost money, especially investors holding certain monthly-paying closed-end funds. In a minute, I’ll describe four such funds that, despite the sour market, have not only generated positive returns so far this year, they have strong longer-term track records as well.
Before I get into the specifics, here’s what you need to know about closed-end funds.
Closed-end funds are similar to conventional mutual funds. However, unlike conventional funds that create new shares as needed, closed-end funds only issue a fixed number of shares at the IPO, and then their shares trade on the open market just like stocks.
Consequently, unlike regular mutual funds and ETFs that always trade close to their net asset values (per-share value of holdings), closed-end funds might trade at a premium (greater than) or discount (less than) their net asset values.
Ideally, you’d like to buy closed-end funds trading at discounts. For instance, if you bought a fund trading at a 10% discount, you’d be getting $100 worth of income-producing assets for $90. However, in practice, you sometimes have to pay a premium to get the strongest performers.
Because they can employ leverage (borrowed cash), closed-end funds typically outperform similar exchange-traded funds that generally don’t use leverage. Why? Closed-end funds might borrow at 2% and turn around and invest that cash in securities paying 4%, thus amplifying their returns. Of course, borrowing could add risk, but that/s not a significant factor considering current economic conditions.
Here are four closed-end funds with strong long-term track records that have also generated positive returns so far this year. They are paying monthly dividends equating to 4.5% to 11.3% yields. Dividend yields are equivalent to bank interest rates except that your principal is not insured so you could lose money if share prices drop.
MFS High Income Municipal (Ticker symbol: CXE): Operated by Massachusetts Financial Services, CXE holds tax-free municipal bonds, mostly rated investment quality. However, about 15% of is portfolio are junk-rated or unrated bonds. Pays federal tax-free monthly dividends equating to a 4.5% annual yield. It has returned 5.7% year-to date, 33% for the past 12 months, and averaged 16% annually for the past three years. It recently traded at a 1% premium to its net asset value.
BlackRock Core Bond (BHK): Holds mostly investment-grade corporate, U.S. government agency and mortgage-backed securities. Pays monthly dividends equating to a 5.1% yield. BHK as returned 3.8% year-to-date, 21% for 12 months, and averaged 11% annually for three years. Recently traded at a 6% discount to its NAV.
Nuveen AMT-Free (no alternative minimum tax) Municipal Credit Income (NVG): Invests primarily in underrated or undervalued municipal bonds, mostly credit-rated BBB or lower. Pays monthly federal tax-free dividends equating to a 5.1% yield. Has returned 3.5% year-to-date, 24% for 12 months, and averaged 11% annually for three years. Recently traded at a 5% discount to its net asset value.
Clough Global Opportunities (GLO): Can hold a mix of global stocks, and corporate and sovereign debt, but currently holds mostly U.S.-based equities. May also employ options strategies to supplement income. Pays monthly dividends equating to an 11.3% yield. Has returned 2.2% year-to-date, 10% for 12 months and averaged 10% annually for three years.
As always, historical performance doesn’t predict the future. Do your own research. The more you know about your funds, the better your results
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/topic/Harry_Domash.