Advertisement
investing

Retirees, Earn Up to 12% Yield with Closed-end Funds

We found three offerings from Pimco and one from Nuveen for those willing to take on considerable risk.

Like ETFs, closed-end funds invest in a package of securities and then trade like stocks. Unlike ETFs, closed-ends don’t have mechanisms designed to ensure that their share prices closely track the value of the funds’ assets, or net asset value (NAV). So it’s not uncommon for a closed-end’s share price to trade for a significant premium to (or discount from) its NAV. Clever investors try to take advantage of these pricing anomalies by buying closed-ends when they trade at big discounts and selling when the discount narrows or turns into a premium.

What could go wrong: Quite a bit. The securities the fund owns may head south. You may buy a fund at a discount to NAV, then see the discount get wider. Or you may be willing to buy what you think is an exceptional closed-end at a premium to NAV, only to see the price swing to a discount. Moreover, closed-ends, especially those that own bonds, often borrow money to improve their results. But leverage works both ways and can decimate returns if the market turns against you. With closed-ends, “the highs are higher and the lows are lower,” says Morningstar analyst Cara Esser.

Advertisement - Article continues below

How to play them: Bill Gross may have left Pimco, but the firm still offers plenty of superb closed-end funds, says Esser. “Pimco’s fixed-income team remains very solid,” she says. The problem is that many of Pimco’s closed-ends are so popular that they trade at premiums to NAV. Look carefully, though, and you can find a few selling at discounts to NAV. Pimco Dynamic Income Fund (PDI, $29, 8.0%), which employs leverage and invests in bonds from all over the world, including non-agency-backed mortgage securities, trades at a 5% discount to NAV. Pimco Dynamic Credit Income Fund (PCI, $20, 9.2%) sells for 10% below its NAV. Also leveraged, the fund has big slugs in non-agency mortgage securities, junk bonds and emerging-markets bonds.

Advertisement
Advertisement - Article continues below

High earners can choose from nearly 200 municipal closed-end funds, many with similar names. Pimco, for example, runs three national tax-free funds with “Municipal Income” in their names. We suggest Pimco Municipal Income II (PML, $12, 6.3%), which trades right around its NAV. About half of the fund’s assets are in muni bonds with maturities of five to 10 years; thanks to leverage, the fund’s average duration is a fairly high 11 years. But for a taxable-equivalent yield of 11.1% for investors in the highest bracket, the fund may be worth the risk. Nuveen is also known for its muni funds. One of its tamer offerings is Nuveen Municipal Income (NMI, $12, 4.3%). The fund employs just a small amount of leverage and thus has an average duration of just 7.6 years. It trades at a 4% premium to NAV. The taxable-equivalent yield is 7.6% for the highest-bracket taxpayer.

Advertisement

Most Popular

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)
tax deadline

12 Tax Deadlines for July 15 (It's Not Just the Due Date for Your Tax Return)

Between due dates for IRA or HSA contributions, paying estimated taxes and other deadlines, there's more to do by July 15 than just filing your federa…
July 10, 2020
65 Best Dividend Stocks You Can Count On
stocks

65 Best Dividend Stocks You Can Count On

These 65 Dividend Aristocrats are an elite group of dividend stocks that have reliably increased their annual payouts every year for at least a quarte…
July 8, 2020
Know Why Your Credit Score Changes: 9 Money Moves to Consider
credit & debt

Know Why Your Credit Score Changes: 9 Money Moves to Consider

Your credit score is a key indicator of your financial well-being and of the risk you pose to lenders. How good is yours?
July 10, 2020

Recommended

13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
July 7, 2020
15 Best Fidelity Funds for the Next Bull Market
mutual funds

15 Best Fidelity Funds for the Next Bull Market

Investors looking to squeeze more profit from the next bull run can look to Fidelity funds for strong active management and tactical investments.
July 7, 2020
10 Stocks to Invest in the Health Care Revolution
healthcare stocks

10 Stocks to Invest in the Health Care Revolution

These companies are fighting disease and improving our standard of care.
July 2, 2020
Cash In With This Gaming ETF
Technology

Cash In With This Gaming ETF

Cash in on the video gaming craze with this fund.
July 1, 2020