The stock market is still extremely volatile and predicting what happens next is harder than it looks.
Consequently, I’m continuing to advise sticking with reliable high-dividend payers that will pay you to wait for the market to settle down, and when it does, hopefully reward you with worthwhile capital gains.
Previously, I’ve provided ideas along those lines using real estate investment trusts and exchange-traded funds. Today, I’ll do the same using closed-end funds.
CEFs are similar to conventional mutual funds. However, unlike conventional funds that create new shares as needed, CEFs only issue a fixed number of shares at the initial public offering, and after that, those shares trade on the open market just like stocks.
Many CEFs employ leverage, meaning that they borrow cash to increase returns. For instance, they might pay 2% to borrow funds that they then could invest to earn 4%. Using leverage often allows CEFs to outperform mutual funds and ETFs with similar portfolios.
There’s one more important difference to consider. While mutual funds and ETFs trade close to the per share value (net asset value or NAV) of their holdings, CEFs usually trade at premiums or discounts. Ideally, you’d like to stick with funds trading at discounts, but sometimes you’ll have to pay a premium to get better returns.
Here are four CEFs worth considering.
• Eaton Vance Senior Floating Rate (ticker: EFR): Pays monthly dividends equating to an 8% annual yield. It holds floating rate bonds which are bonds with interest rates that vary with a specified benchmark such as the federal funds rate. Their valuations are more stable than fixed rate bonds that lose value when market rates rise. This fund has lost 7% over the past 12 months compared to a 9% loss for the S&P 500. However, it has averaged 5% annually for the past three years and 3% annually for five years. It recently traded at a 4% discount to its net asset value (NAV).
• Cohen & Steers real estate investment trust and Preferred Income (RNP): Pays monthly (7.1% yield). Holds a mix of Real Estate Investment Trust (REIT) common stocks and real estate-related fixed income securities such as bonds and preferred stocks. Down 6.1% for 12 months, it has averaged 8% and 9% annually over three and five years. Recently traded at a 4% discount.
• Source Capital (SOR): Pays monthly dividends (6.4% yield). Holds a mix of common stocks and bonds. For stocks, selections depend on market conditions. Currently most are in the financial services, communication services, and technology sectors. Its bond portfolio varies with market conditions and can range from U.S. treasuries to high-yield bonds. Source Capital has dropped 7.6% over 12 months, but has averaged 7% annually for three years, and 6% annually for the past five years. Recently traded at a 9% discount to its NAV.
• Nuveen Core Equity Alpha (JCE): Pays quarterly (10.9% yield). Holds large-cap common stocks. Biggest holdings include Apple (AAPL), Microsoft (MSFT), Alphabet GOOG), Amazon (AMZN), and United Health Group (UNH). It also employs an options strategy to enhance returns. It’s down 2% for 12 months, but has averaged 11% and 10% annually for three and five years. Recently traded at a 3% premium.
Those are my picks. But 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.