Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

5 Big-Yield Funds to Watch

By

You can go out and hunt for yields, or you can find a good manager who knows how to "make" yields using options. After setting some rigorous criteria, this handful made the cut.

PrintPRINT

Today's low-yield world puts income investors in a tough spot.

Fixed-income alternatives are uninspiring: five-year US Treasuries yield 0.74%, ten-year US Treasuries yield 1.73%, and investment-grade corporate bonds yield only 3.18%. Newly issued corporate bonds-which have reached $3.3 tril-lion in value so far in 2012-are being sold at an even lower average yield of 2.68%.

To earn a decent annual return, a fixed-income investor currently needs to assume much greater credit risk in the form of non-investment-grade bonds (i.e., less than triple-B rated, also known as "junk"), which currently average 6.68%.

The problem with junk bonds is that there is an increased risk of default, especially in a weak economic environment as we are experiencing now. Since the beginning of 2011, the default rate on junk bonds has more than doubled, from 0.8% to 1.8%, and JP Morgan forecasts the default rate to rise further into 2014.

High-yield, dividend-paying stocks are another alternative, but investors have already bid up high-yield stocks to arguably nosebleed levels. According to fund manager AllianceBernstein, stocks with yields 20% or more above the market's now account for 44% of the S&P 500 on a cap-weighted basis. That's their highest share in the last three decades, and well above the historical average of 36%.

High Yields at a Discount
One high-yield asset class flying under investors' radar and which remains attractively priced is covered-call closed-end funds (CEFs).

Studies have demonstrated that a covered-call equity portfolio outperforms a buy-and-hold stock portfolio over the long-term. The outperformance of covered calls is most pronounced in down markets, which makes the strategy especially attractive to risk-averse investors. The strategy may also offer a tax shelter, since the option income is classified as capital gains, and thus can be used to offset capital losses.

There are 600 CEFs in existence, and about 300 of them are currently trading at a premium to their net asset value (NAV)-"the largest number of funds at a premium we've seen."

I don't recommend buying CEFs at a premium to NAV, because it means buying securities for more than they are worth. It would be like paying $1.05 for a dollar bill. Almost all of the CEFs trading at premiums hold fixed-income securi-ties. However, CEFs that invest in stocks remain reasonably priced, and on average are trading at a 6% discount to NAV.

Using the www.cefconnect.com screener, I found 31 stock CEFs that focus exclusively on a covered-call option strategy. Their average disÂ-count to NAV is -8.1%, which is greater than the stock-CEF average (a good thing).

Only one covered-call CEF trades at a premium to NAV (+9.86%) and I consequently would avoid it-the GAMCO Natural Resources Gold & Income Trust (NYSE:GNT). This CEF pays a super-high 10.66% annual yield, but if the CEF were to trade at NAV, the capital loss from the CEF price decline would almost wipe out this yield.

< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE