Income On Sale

2/15/2016


Most closed-end funds offer high income on the cheap — but with a few notable twists. The 11 high-potential funds listed in the table below average distribution rates of 8.7%.

Depending on a fund's underlying holdings, distributions may include interest income, dividends, long and short-term capital gains, and even return of capital. Some managed-income funds pay a fixed amount, even if they don't generate enough income to cover the obligation.

Closed-end funds trade throughout the day, with supply and demand setting their market price. Among 560 closed-end funds tracked by Morningstar, 496 trade at discounts, meaning they are cheaper than their net asset value (NAV) — the underlying value of the stocks and bonds in their portfolios. In other words, you can buy a dollar's worth of assets for less than a dollar.

Factors such as a fund's distribution rate, relative performance, trading liquidity, and potential tax liabilities from unrealized gains can impact the discount or premium. On average, funds holding stocks trade at a discount of 10.1%, versus 6.2% for bond funds, according to Lipper. To put a fund's discount in perspective, compare it to its historical norm, as shown in the table below.

SELECT CLOSED-END FUNDS
Listed below are 11 attractive income picks that trade at discounts to their 12-month average net asset value (NAV). The leverage ratio represents loans as a percentage of the sum of leverage and net assets.
Net
Asset
Value
(NAV)
($)
Income Distribution
Discount to NAV
Market Returns
Fund (Price; Ticker)
Annual
Rate
(%)
Frequency
Recent
(%)
12-Month
Average
(%)
Leverage
Ratio
(%)
12
Months
(%)
5 Yrs.
(Annual.)
(%)
Expense
Ratio
(%)
Category
Adams Diversified Equity
($11; ADX)
13.51
8.3
Quarterly
(17.0)
(14.4)
0
(12.2)
6.5
0.58
Large-cap blend
Adams Natural Resources
($16; PEO)
18.97
8.8
Quarterly
(17.8)
(14.4)
1
(32.2)
(5.2)
0.63
Energy
BlackRock Capital &
Income ($12; CII)
13.28
9.9
Monthly
(9.0)
(6.5)
0
(9.3)
5.0
0.99
Large-cap value
BlackRock Floating Rate
($12; BGT)
13.57
6.3
Monthly
(12.3)
(9.6)
25
(4.2)
0.8
1.55
Bank loan
BlackRock Ltd. Duration
Inc. ($14; BLW)
15.63
9.5
Monthly
(12.9)
(11.4)
31
(5.8)
3.7
1.15
High-yield bond
Cohen & Steers Inc.
Realty ($10; RQI)
11.95
9.3
Quarterly
(13.4)
(12.0)
24
(9.3)
9.3
1.89
Real estate
Dreyfus Municipal Income
($9; DMF)
9.79
6.4
Monthly
(3.3)
(2.5)
34
4.1
9.0
1.25
Tax-free bond
Eaton Vance Dividend
Inc. ($17; EVT)
19.27
9.3
Monthly
(11.1)
(9.8)
23
(10.0)
7.5
1.35
Balanced
Eaton Vance Enhanced
Inc. II ($12; EOS)
12.29
9.1
Monthly
(6.4)
(6.0)
0
(9.7)
7.3
1.11
Large-cap gro.
Eaton Vance Global Div.
Inc. ($8; EXG)
8.65
12.8
Monthly
(11.6)
(7.2)
0
(8.9)
4.2
1.07
World stock
Reaves Utility Inc.
($27; UTG)
28.73
6.8
Monthly
(6.8)
(4.5)
28
(9.3)
12.9
1.62
Utilities

 

Fund performance is reported relative to market price. However, closed-end funds also report returns based on their NAV. Importantly, when a fund's discount narrows, the market-price return will exceed that fund's NAV return.

For example, suppose you pay $8 for a fund with an NAV of $10, putting the discount at 20%, or a $2 spread. Assuming a year later the NAV climbs 10% to $11 and the spread narrows to $1, the market price would be $10, implying a return of 25%.

Many funds use leverage, or borrowed money, to enhance returns and boost income distributions. Notably, leverage can also increase a fund's share-price volatility and expenses, and thus its risk.

OUR RECOMMENDED MUTUAL FUNDS
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($25; ARTIX)
(11.5)
C
9
9
58
Baird Core Plus Bond ($11; BCOSX)
1.2
C
9
4
63
Dreyfus Midcap Index ($29; PESPX)
(10.3)
B
0
0
61
Dreyfus Small Cap Stock Index
($23; DISSX)
(11.1)
B
0
0
96
Homestead Small Company
($31; HSCSX)
(11.7)
B
5
6
86
iShares MSCI EAFE Small-Cap ETF
($44; SCZ)
(7.2)
A
4
6
94
PRIMECAP Odyssey Stock ($21; POSKX)
(11.7)
E
10
10
87
T. Rowe Price Divers. Small-Cap Growth
($22; PRDSX)
(15.3)
B
7
7
96
T. Rowe Price Value
($28; TRVLX)
(9.6)
C
10
11
84
Thompson Bond ($10; THOPX)
(3.6)
E
9
4
14
Vanguard 500 Index ($171; VFINX)
(9.2)
B
7
8
89
Vanguard GNMA ($11; VFIIX)
1.4
D
0
0
93
Vanguard Growth Index
($48; VIGRX)
(11.7)
B
10
11
81
Vanguard High-Yield Corp. ($5; VWEHX)
(3.4)
B
5
6
99
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
1.8
B
0
0
95
Vanguard Selected Value
($23; VASVX)
(13.0)
E
5
8
69
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
0.7
A
0
0
100
Vanguard Total Bond Mkt. Index
($11; VBMFX)
2.1
A
0
0
79
Vanguard Wellesley Income
($24; VWINX)
(0.8)
A
0
0
99
Vanguard Wellington ($35; VWELX)
(5.0)
A
10
10
97

* Year-to-date ranks through Feb. 9 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%;
E = bottom 20%.  Fund ratings are percentile ranks based on our fund-rating system.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com