Steady Income From This Overlooked Moneymaker
What’s a closed-end fund (CEF), you ask?
If you like to receive big, fat dividend/interest checks, they may be exactly what you are looking for.
CEFs are very similar to mutual funds and ETFs, but very few investors know about them.
CEFs have a fixed number of shares outstanding, which are first sold to the public in initial public offerings like stock and then subsequently offered in secondary offerings after the IPO.
CEFs are essentially a mutual fund that give you a stake in a large, professionally managed fund.
However, unlike mutual funds, CEFs trade on the NYSE or Nasdaq like an ETF. Because CEFs trade on stock exchanges, their prices change throughout the market day.
Because of the daily price movements, share price can trade at a premium or discount to the fund’s net asset value (NAV).
Whether a CEF trades at a discount or premium to its NAV boils down to the popularity of the fund’s investment strategy, i.e., value, momentum, microcap, etc.
NOTE: NAV is the liquidation value of the assets in the fund portfolios.
What this means is that savvy investors can sometimes pay 95 cents, 90 cents or even less for $1.00 worth of assets.
The ability to buy top-managed funds at a discount is the main reason you should consider CEFs. That’s especially true for income-focused CEFs.
Some CEFs pay out oversized income streams — 7% yields are easy to find — which become even juicer if the CEF is selling at a discount to its NAV.
I regularly find income-focused CEFs trading 90 cents on the dollar (or less), which gives you a great opportunity for a double-digit capital gain, as well as a 7%-plus stream of income.
That’s the definition of a win-win!
There are over 500 CEFs to choose from, so there’s no shortage of choices.
Here are two examples:
CEF Bargain No. 1: RMR Real Estate Income Fund (NYSE: RIF). This CEF has been around since 2005 and primarily invests in a diversified portfolio of REITs in all shapes and sizes from retail outlets, assisted-living facilities, office buildings and even data centers for cloud-computing companies.
RIF currently pays out a 33-cent distribution each quarter. That works out to more than an 8% yield based on last Friday’s closing price of $16.53.
Better yet, RIF is trading at over a 15% discount to its NAV, so you can earn additional double-digit capital gains if the discount narrows or disappears.
CEF Bargain No. 2: John Hancock Hedged Equity & Income Fund (NYSE: HEQ). John Hancock isn’t the first company most investors think of as an investment powerhouse, but HEQ has a brilliant strategy that could be ideal for the current wildly volatile stock market
HEQ uses a sophisticated hedged strategy of owning high-quality dividend-paying stocks while short-selling low-quality companies with deteriorating fundamentals.
HEQ is also selling at a discount of 3% to its NAV, which isn’t as large as RMR Real Estate Income Fund. However, it’s very attractive given that it paid out $1.66 in dividends over the last 12 months.
This equates to a 9.6% yield!
If you’re nervous about the stock market, HEQ hedged strategy combined with its near double-digit income is worth your consideration.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch