Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19
How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio - 10th Jan 19
What’s Next for the US Dollar, Gold, Stocks & Bonds? - 10th Jan 19
America's New Africa Strategy - 10th Jan 19
Gold Mine Production by Country - 10th Jan 19
Gold, Stocks and the Flattening Yield Curve - 10th Jan 19
Silver Price Trend Forecast Target for 2019 - 10th Jan 19

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

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

© 2005-2018 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

6 Critical Money Making Rules