Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

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

© 2005-2019 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