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.

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.

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.

Most Popular

Dying Careers You May Want to Steer Clear Of
careers

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
5 Top Dividend Aristocrats to Beef Up Your Portfolio
dividend stocks

5 Top Dividend Aristocrats to Beef Up Your Portfolio

The 65-member Dividend Aristocrats are among the market's best sources of reliable, predictable income. But these five stand out as truly elite.
September 14, 2021
7 Best Commodity Stocks to Play the Coming Boom
commodities

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021

Recommended

ETFs and Mutual Funds with Todd Rosenbluth
Index Funds

ETFs and Mutual Funds with Todd Rosenbluth

Which is better: ETFs or mutual funds? And how do you decide where to put your investments? CFRA fund expert Todd Rosenbluth has some answers. Also, h…
September 22, 2021
These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle
Markets

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021
Is a Target Date Fund Right for You?
investing

Is a Target Date Fund Right for You?

You're busy, and poring over investments is a pain. Wouldn't a target date fund be easier? Take a look at their pros and cons to see if incorporating …
September 14, 2021