Most banks are still paying
less than 3% interest on CDs and money market accounts. But, you
could more than double those returns using closed-end funds (CEFs).
CEFs are similar to
conventional (open-end) funds. However, unlike conventional funds
that create new shares as needed, CEFs only issue a fixed number of
shares at the IPO, and after that, those shares trade on the open
market just like stocks.
are two important differences between CEFs
and conventional mutual funds that you need to
1) Many CEFs employ leverage,
meaning that they borrow cash to increase returns. For instance,
they might pay 3% to borrow funds that they then could invest to
earn 6%. That practice allows them to pay higher dividends than
open-end funds or ETFs.
2) While open-end funds always
trade at the per share value (net asset value or NAV) of their
holdings, CEFs might trade at a premium (above) or discount (below)
their NAVs. While it’s preferable to buy CEFs trading at discounts,
you usually have to pay up for outperforming funds.
I’m going to describe five
CEFs paying monthly dividends equating to 5% to 11% dividend yields.
Dividend yields are equivalent to bank interest rates except that
your principal is not insured so you could lose money if share
These CEFs have soundly beat
the S&P 500’s 6% return over the past 12-months as well as its 16%
average annual three year return. Four also beat the S&P’s 10%
average annual five year mark. The fifth, Blackstone Science &
Technology has only been operating for four years. Here are the
Guggenheim Strategic Opportunities (GOF): Pays dividends equating to
an 11.1% yield. It holds both government and corporate bonds.
Guggenheim returned 12% over the past 12-months and averaged 23% and
11% annual returns over the past three and five years. It recently
traded at a 12% premium to its net asset value.
Pimco Income Strategy Fund II (PFN): Paying a 9.4% dividend yield,
it also holds government and corporate securities. PFN has returned
12% over 12-months and averaged 20% and 11% annual returns over
three and five years. It recently traded at a 7% premium to its NAV.
Pimco Dynamic Credit & Mortgage Income (PCI): Paying 8.6%, PCI holds
mortgage-backed securities. The fund has returned 14% over 12-months
averaged 24% and 12% annual returns over three and five years. It
recently traded even with its NAV.
Delaware Investments Dividend & Income (DDF): Paying 8.5%. DDF holds
dividend paying common stocks and corporate bonds. Delaware returned
36% over 12-months and averaged 28% and 15% annually over three and
five years. It recently traded at a 14% premium to its NAV.
BlackRock Science & Technology Trust (BST); Paying 5.8%, BlackRock
holds most major U.S. and global tech players. Since most tech
stocks don’t pay significant dividends, BlackRock sells covered call
options on its holdings to generate income. The fund, which only
went public in October 2014, returned 19% over 12 months and
averaged a 40% annual return over three years. It recently traded an
8% premium to its NAV.
As always, historical performance doesn’t predict the
future. Do your own research. The more you know about your funds,
the better your results.