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All Contents © 2020The Kiplinger Washington Editors
By Ryan Ermey, Associate Editor
| February 1, 2018
With robust yields and share prices trading at a discount to the value of their investment portfolios, these four closed-end funds are worth exploring now. For more about how closed-end funds work (and can add juicy payouts to your portfolio), check out Earn Up to 9% With These Funds
Funds are listed alphabetically. Prices and other data are through January 12. Distribution rate is based on share price, and expense ratios include borrowing costs. Source: Morningstar Inc.
Discount to Net Asset Value 9.5%
1-Year Total Annualized Return 16.5%
3-Year Total Annualized Return 9.7%
Distribution Rate 7.8%
Expense Ratio 2.90%
Ares Dynamic Credit Allocation Fund (ARDC, $16) holds a mix of floating-rate loans, relatively risky junk bonds and other types of debt. The fund’s 31% leverage would exacerbate losses in the case of a junk-bond sell-off. But a thriving economy lessens the risk of junk issuers defaulting, and floating-rate loans, which make up the lion’s share of the portfolio, should benefit as interest rates rise because these notes are pegged to short-term benchmarks that reset every 30 to 90 days.
The fund’s 9.5% discount to NAV is less than its historical average but still 3.1 percentage points greater than that of the average bank loan–focused bond fund. Over the past five years, the fund’s return (including distributions) has outpaced 96% of similar closed-end funds.
Discount to Net Asset Value 1.8%
1-Year Total Annualized Return 61.6%
3-Year Total Annualized Return 24.6%
Distribution Rate 5.4%
Expense Ratio 1.10%
Consider Blackrock Science & Technology Trust (BST, $29) if you’re a fan of tech stocks but would appreciate fatter yields. The fund doesn’t use debt or preferred shares to boost its 5.4% distribution rate, which is modest for a CEF but more than the 1.3% average dividend yield for tech shares. Instead, it follows a covered call strategy, selling call options on stocks in the portfolio that give the buyer the right to purchase a stock at a set price over a certain time period. The fund collects premiums on the options it sells, which bolsters the yield of the underlying portfolio.
Top holdings include Apple, Alphabet, Microsoft and Amazon.com. The fund’s 1.8% discount makes it a touch more expensive than the average fund that employs a covered call strategy.
Discount to Net Asset Value 7.3%
1-Year Total Annualized Return 1.5%
3-Year Total Annualized Return 6.8%
Distribution Rate 8.1%
Expense Ratio 1.81%
Real estate investment trusts (REITs) have been popular among income investors, but fears are mounting that rising interest rates could eat into yields as real estate owners pay more to finance their properties. Those concerns have driven REIT CEF discounts deeper recently, creating bargains.
Cohen & Steers Quality Income Realty Trust (RQI, $12) is selling at at 7.3% discount to NAV, more expensive than the three-year average discount of 9.8% but only one-half of a percentage point more expensive than the average real estate CEF. The fund is 23.9% leveraged, enough to sting if REITs take an ugly turn.
Discount to Net Asset Value 7.0%
1-Year Total Annualized Return 3.5%
3-Year Total Annualized Return -8.8%
Expense Ratio 4.40%
Stabilizing oil prices, which have risen nearly 50% from their June 2017 lows, are good news for energy-focused master limited partnerships (MLPs) and the CEFs that own them. Such CEFs offer an opportunity to squeeze extra yield out of an already high-yielding asset class. Kayne Anderson Energy Development (KED, $18) concentrates on conservative MLPs—those that essentially collect a toll on oil or gas flowing through pipelines—and limits MLPs involved in the riskier business of oil and gas exploration.
The fund trades at a 7% discount, 3.7 percentage points cheaper than its average peer. It is 32% leveraged; as a result, the fund will face magnified losses if, say, oil prices tumble again.