Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Beat Ben Bernanke's Zero Rates with These Juicy Double-Digit Yields

Portfolio / Investing 2012 Jun 26, 2012 - 07:06 AM GMT

By: Money_Morning

Portfolio

Best Financial Markets Analysis ArticleMartin Hutchinson writes: With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.

From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.


You see, in Ben's world, the safety of money in the bank earning a reasonable interest rate is a dangerous thing.

It's why folks with savings have been virtually forced into the market these days in search of higher yields.

One place where income investors can find them is in closed-end funds.

A few of these funds even pay juicy double-digit yields -- like the one my Permanent Wealth Investor subscribers have earned 20% on in two years.

But here's the best part. You can actually buy closed-end funds like these on sale.

Let me explain.

Buying Closed-End Funds at a Discount
Developed in the 19th century, closed-end funds are the oldest type of mutual fund. If you understand the idea behind a mutual fund, then understanding a closed-end fund is easy.

In essence, they are the same thing- pools of money controlled by a professional money manager.

However, in contrast, a typical mutual fund is also what's known as an open-ended fund.

This means that the fund itself can issue as many shares as it needs to meet the demand on any given day. So the total number of shares in this type of fund isn't fixed at all-hence the term open ended. Shares are added as needed.

As a result, the cost of any share in one of these funds is always bought or sold at its current Net Asset Value (NAV). That's why shares of open-end funds don't trade per se on the exchanges.

A closed-end fund, on the other hand, is totally different. Unlike an open-ended fund, closed-end funds issue a limited number of shares. That means the number of shares outstanding is fixed.

So closed-end funds actually trade on an exchange like a stock, and are bought or sold minute-by-minute with a price driven by market sentiment.

That means that just like a stock, shares may trade at a premium or discount to their net asset value. That's a key difference, and why I say closed-end funds can be bought on sale.

In fact, the typical closed-end fund trades at anywhere from a 2% to 10% discount to its net asset value.

However, just like mutual funds, closed-end funds invest in a portfolio of shares or bonds according to the fund's stated objectives. They can also use leverage and invest in private equity. While they generally pay out dividends as received on the underlying investments, they are not obliged to do so.

Closed-end fund managers also use a number of strategies to prevent their funds from trading too far below net asset value (which leaves them vulnerable to a takeover). Paying out dividends is one way to achieve this, which is why closed-end funds often achieve a high dividend payout or yield.

How to Choose Closed-End Funds
These come in several different types, some of which have hidden risks attached, so I'd like to provide you with a guide through this investing jungle.

Primarily, the ones with high dividend yields are of four types. They include:

•Dividend harvest funds: These funds buy shares in companies that are about to pay a dividend, and then sell the stock after the dividend is paid. By doing this, they can rotate through companies with different payment dates, and thereby achieve a high dividend payout. The problem is that shares generally trade lower after a dividend is paid, by the amount of the dividend. Two funds of this type, the Alpine Global Dividend Fund (NYSE:AGD) and the Alpine Dynamic Dividend Fund (NYSE:AOD), have seen their net asset value decline substantially since their inception. For us as investors, that's generally not attractive, since we are getting taxable dividends at the cost of a capital loss.
•Leveraged funds: These funds achieve their high dividend by leverage and investing in shares or bonds whose yields exceed the cost of the leverage. A very popular type of this fund in recent years has been the mortgage REIT, such as American Capital Agency (Nasdaq: AGNC) and Annaly Capital (Nasdaq: NLY); both have dividends of 14.9% and 13%. The problem with these is that when interest rates rise, the price of the mortgages declines and their funding costs rise, so most of the income disappears and the funds have a capital loss. Similarly, funds achieving the same effect by leveraged investing in stocks have much more risk in a bear market. Still AGNC and NLY have between them $26 billion of market capitalization, so their marketing strategy works even if their investment model fails in the long run.
•Option-income funds: These funds buy shares and sell call options, paying out the call-option premiums they receive as income. By definition, the net asset value of these funds normally underperforms the market indices, since shares are called away from them in bull markets. However, on an overall basis, skillful management can enable the funds to provide a total return, including dividends and capital returns, which is at least competitive. The Eaton Vance Tax-Managed Buy-Write Income Fund (NYSE: ETB), currently makes a quarterly payout of 32.4 cents/share, giving it a yield of just under 10%. What's more, it's currently trading at about 11% below net asset value. For me, it's always attractive to buy $100 of assets for $89.
•International unleveraged funds: Finally, there are a few international closed-end funds, normally invested in single-country markets. They provide support to their share prices simply by paying out a percentage of net asset value each quarter, even though only part of the payout is covered by dividends. Provided the market in which the funds invest is growing satisfactorily and is not overpriced (so dividends are a substantial part of the payout) these funds can maintain their net asset values as well as making good payouts. For example, the Aberdeen Chile Fund (NYSE: CH) is the one I mentioned earlier as being part of my Permanent Wealth Investor portfolio. It invests in one of the world's premier growth markets and currently makes quarterly payouts at a rate of 10% of net asset value per annum.

So keep in mind there's more than one way to beat Ben Bernanke at this game. The right closed-end fund can give you both a decent yield and decent growth prospects.

Good Investing,

Martin Hutchinson, Editor
Permanent Wealth Investor

Source :http://moneymorning.com/2012/06/26/beat-ben-bernanke-with-these-juicy-double-digit-yields/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in