Investing in closed-end funds for income
Americans planning for retirement in a few decades typically look to exchange-traded funds as investment vehicles, and rightly so. Those simple products are all most long-term investors need. But if you’re looking for a bit more income potential, or you simply have different investing goals than the typical 401(k) crowd, then closed-end funds are worth exploring. As the name implies, closed-end funds have a fixed inventory of shares and do not create or redeem shares like ETFs — and as a result, they can trade for a slight premium or discount over time. This adds volatility and complexity, but it also allows these funds to be much more active and sophisticated investment vehicles. Particularly if you’re looking for high-yield investments, these seven closed-end funds with big dividends may prove interesting alternatives to vanilla ETF index funds.
AllianzGI Equity & Convertible Income Fund (ticker: NIE)
The AllianzGI Equity & Convertible Income Fund invests in growth-oriented companies, deploying fundamental analysis focused on factors like above-average earnings growth, high return on invested capital, a healthy or improving balance sheet and competitive advantages. Growth investments typically do not yield a ton in dividends, as they are more interested in investing in expansion plans than paying back shareholders, but this Allianz fund’s partial focus on “convertible” securities like bonds that can be turned into common stock shares allows it to layer on investments that offer income opportunities, too. As equities go, top holdings include Big Tech names such as Apple (AAPL) and Amazon.com (AMZN).
Current yield: 6.3%
Nuveen AMT-Free Municipal Credit Income Fund (NVG)
This Nuveen fund is structured in a way to harness tax-efficient gains, paying particular attention to the alternative minimum tax, or AMT. As AMT rates can be as high as 28%, a specific focus to avoid these tax burdens can make a big difference in your total investment returns. Specifically, NVG invests in long-term, investment-grade municipal debt and other related investments that are exempt from regular federal income taxes. NVG does deploy “leverage,” however — borrowing to supercharge its income potential, so this is not as low-risk of an investment as other muni bond offerings on Wall Street. That’s the trade-off you make for its big yield.
Current yield: 5.1%
Cornerstone Total Return Fund (CRF)
As the name implies, this Cornerstone fund looks for total returns that account for share appreciation as well as dividends. That means the fund’s portfolio consists principally of equity investments in companies of all sizes and geographies, and it may include preferred stock and convertible securities as well as common shares. The fund is admittedly heavy in the technology sector — with various investments in Microsoft Corp. (MSFT) and Facebook (FB) leading its portfolio — but those tactical investments have helped push distributions up to a stunning level. Shares are flat year to date, but that shouldn’t matter to investors given that the goal of this fund is indeed a total return.
Current yield: 19.7%
Cornerstone Strategic Value Fund (CLM)
Another Cornerstone fund with simply amazing yield is CLM, which instead has a value-oriented focus. That means major bank JPMorgan Chase & Co. (JPM) and similar companies in the financials sector make their way toward the top of the list. Admittedly, Big Tech giant Microsoft is still in the No. 1 spot just like in the prior CRF fund, with Alphabet (GOOG) right behind it in weighting. If you’re looking for income, it’s important to note the yield in this sister Cornerstone fund is equally impressive — so perhaps managers are on to something with their current strategy.
Current yield: 20%
Western Asset High Yield Defined Opportunity Fund (HYI)
The Western Asset High Yield Defined Opportunity Fund invests in fixed-income markets across the globe, primarily via high-yield corporate debt — colloquially known as “junk” bonds. Obviously, there is risk when you are extending credit to a shaky company that may not be able to pay you back, but HYI has a strong history of harnessing big-time yield in exchange for these loans. It also knows how to build a diversified portfolio to protect investors, even if a few of the individual investments do manage to fall through. That adds up to a big yield that helps offset the risk of share price declines.
Current yield: 7.7%
Eaton Vance Limited Duration Income Fund (EVV)
The Eaton Vance Limited Duration Income Fund invests primarily in high-yield mortgage-backed securities and corporate junk bonds. While much of its portfolio is theoretically backstopped by the government via agency mortgage debt issued by entities like Fannie Mae, the 2008 housing crisis should be proof that even these real estate assets are not a sure thing. Furthermore, big positions in EVV’s portfolio include loans to struggling telecom CenturyLink (CTL) that yield a pretty penny but come with substantial risks. In exchange for a bit more risk, investors clearly get to enjoy a bit more yield.
Current yield: 10.3%
Wells Fargo Income Opportunities Fund (EAD)
Part of the Wells Fargo Advantage Funds family, EAD is a closed-end fund that invests in the fixed-income markets via junk bonds, preferred stock and other instruments that bring higher risk but higher potential reward. Its portfolio is a quirky lineup of assets you likely would never invest in otherwise, such as bonds issued by automobile auction operator KAR Auction Services (KAR) or wind and solar energy company Pattern Energy Group. But if you’re looking for high-yield investment opportunities, you can’t argue with the generous yield offered by this closed-end fund.
Current yield: 9.1%
Seven closed-end funds with big dividends:
— AllianzGI Equity & Convertible Income Fund (NIE)
— Nuveen AMT-Free Municipal Credit Income Fund (NVG)
— Cornerstone Total Return Fund (CRF)
— Cornerstone Strategic Value Fund (CLM)
— Western Asset High Yield Defined Opportunity Fund (HYI)
— Eaton Vance Limited Duration Income Fund (EVV)
— Wells Fargo Income Opportunities Fund (EAD)
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