How to Pick Winning CEFs (for 387% Yields, 7%+ Dividends)
Once people get a taste of closed-end funds (CEFs), they usually rave about one thing: dividends! Returns of 7% and above are common with CEFs, and they often come to you every month.
We also like that even though CEFs are only a small corner of the market (with only about 500 or so), we can build a diversified portfolio with them: there are CEFs that hold US and international stocks, bonds , real estate — even private equity. You name it.
This wide range allows us to circumvent a problem that most income seekers face: being forced to wager large sums on one or more stocks just to get big wins. This often results in portfolios biased towards certain sectors and delivering disappointing performance.
It’s a story that investors who bought dividends AT&T (T), whose shares are yielding a whopping 6% right now, be aware. But that high return has everything to do with AT&T’s stock price falling (because you calculate the current return by dividing the annual cash payout by the current stock price).
The stock was weighed down in part by the fact that it cut its dividend as part of the split of its Warner Media division, a major strike against the stock, which had become a source of income for conservative investors in dividends.
The danger of staking it on a single high yield
But while we CEF buyers diversify, we must always choose our funds wisely, selecting those that trade at unusually large discounts to net asset value (NAV, or the value of the investments in their portfolios) with the right mandates at the right time, as well as managers with proven track records.
Find a fund with all of these strengths and you’ll give yourself an excellent chance of scoring a winner like the Columbia Seligman Premium Tech Growth Fund (STK), a 7% return that has crushed the market over the past decade, with a total return of 387%.
But the story would have been very different if you had bought and followed the oil and gas-focused business (and a 7.7% return). ClearBridge Energy Midstream Opportunity Fund (EMO), which has significantly underperformed as this sector has been hammered.
The best against the worst: a wide range
There’s nothing new under the sun here: income-starved investors often ignore other flaws to secure a big gain (in EMO’s case, a mandate that locks it into a volatile sector).
That’s why a fund’s performance is only one of the metrics we assess in my CEF Insider service. Because we know that over time, CEFs with other attributes – like strong managers, proven track records, and deep discounts – will attract more investors, who will send their prices skyrocketing.
The “all-in-one” game just doesn’t work with CEFs
Finding strong CEFs, of course, involves legwork. Some people think they can get around this by buying a basket of CEFs through an algorithmically managed exchange-traded fund (ETF). After all, the whole point of ETFs is to allow us to buy a bunch of stocks at once so that we don’t have to pick winners and avoid losers ourselves. So can’t you just buy an ETF that holds CEFs and call it a day?
Such a move sounds good, but it just doesn’t work with CEFs. The story of the Invesco CEF Income Composite ETF (PCEF), a collection of CEFs that pays a dividend yield of 9.4% demonstrates this.
Good intentions, bad results
The reason for this is that the PCEF combines many underperforming CEFs, which means that the fund itself significantly underperforms the market.
While we’re willing to accept some underperformance for higher return (the 9.4% PCEF payouts are nice), making a spectacular profit smaller than that of the index while taking a similar volatility is unacceptable. Plus you have the problem of high fees: the PCEF management fee of 0.5% of assets seems reasonable, but when you combine that with the fees on the fund’s CEFs, you get a total expense of 1.99 %. (These double fees are a particular problem for funds that devote their entire portfolio to owning other funds.)
Invesco is a great ETF company, but once you look beyond the performance of PCEF, you can see that it has little to offer.
let’s try again
Could the problem be PCEF? Maybe the ETF-of-CEF approach works if you try another fund.
The fact is, all CEF ETFs have underperformed the market, and the big returns aren’t making up for that. Take the Amplify High Income ETF (YYY), which owns 45 CEF and pays a dividend of 11.5%. Its performance is only marginally better than that of the PCEF over the past decade.
Second CEFs Falls Flat ETF
What’s happening here is that YYY, like most ETFs, is locked in by the specifications they use to select CEFs and cannot change course with changes in the economy (unlike a CEF managed by a human manager).
YYY picks its CEFs focusing on fund performance (thus making the same mistake investors AT&T and CEM made), discounting NAV (a strong indicator, of course, but not good enough on its own because discounting some funds never shrink) and liquidity. And for that, YYY investors have to pay a fee of 2.72% of assets, which is more than most CEFs with real managers!
In short, until there is an ETF whose algorithm can replace a human manager – and that’s not expected anytime soon – carefully choosing a portfolio of CEFs is a much better solution than trying to take the ETF shortcut.
These 5 “Lifetime Profit” CEFs Crush Stocks (and Return 9.9%)
Now that I’ve explained why it’s better to buy CEFs “directly,” rather than through an ETF, here’s something most people don’t know about CEFs: the most established of the bunch. almost never lose money – and they pay us dividends nearly 6 TIMES the typical S&P 500 payout!
Here’s what the numbers say: of the 326 CEFs that have been around for 10 years or more, only 38 have lost money in the last 10 years, for a 88% success rate.
It’s getting better: of the 38 that lost money, most were foreign or emerging market funds, and those stocks have significantly underperformed their US cousins at this time.
Ditch those stragglers and the FED “success rate” jumps to an incredible 94%.
I sifted through the entire CEF universe to find the best funds to recommend in my CEF Insider service. And I’ve taken some of my best buys from our portfolio and dropped them into a new special report that I want to share with you today.
These 5 choices incredible efficiency of 9.9% between them, and I call for 20% + price up everyone next year.
Click here and I’ll explain why CEFs are some of the most reliable investments you can make, And I’ll show you how to download your FREE special report, with 5 of my top buys earning 9.9% (and, like I just said, poised for prize gains of over 20%!)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.