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 Double Your Interest Income With These Closed-End Funds

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Most banks are still paying less than 3% interest on CDs and money market accounts. But, you could more than double those returns using closed-end funds (CEFs).

CEFs are similar to conventional (open-end) funds. However, unlike conventional funds that create new shares as needed, CEFs only issue a fixed number of shares at the IPO, and after that, those shares trade on the open market just like stocks.

Here are two important differences between CEFs and conventional mutual funds that you need to know:

1) Many CEFs employ leverage, meaning that they borrow cash to increase returns. For instance, they might pay 3% to borrow funds that they then could invest to earn 6%. That practice allows them to pay higher dividends than open-end funds or ETFs.

2) While open-end funds always trade at the per share value (net asset value or NAV) of their holdings, CEFs might trade at a premium (above) or discount (below) their NAVs. While its preferable to buy CEFs trading at discounts, you usually have to pay up for outperforming funds.

Im going to describe five CEFs paying monthly dividends equating to 5% to 11% dividend yields. Dividend yields are equivalent to bank interest rates except that your principal is not insured so you could lose money if share prices drop.

These CEFs have soundly beat the S&P 500s 6% return over the past 12-months as well as its 16% average annual three year return. Four also beat the S&Ps 10% average annual five year mark. The fifth, Blackstone Science & Technology has only been operating for four years. Here are the details.

Guggenheim Strategic Opportunities (GOF): Pays dividends equating to an 11.1% yield. It holds both government and corporate bonds. Guggenheim returned 12% over the past 12-months and averaged 23% and 11% annual returns over the past three and five years. It recently traded at a 12% premium to its net asset value.  

Pimco Income Strategy Fund II (PFN): Paying a 9.4% dividend yield, it also holds government and corporate securities. PFN has returned 12% over 12-months and averaged 20% and 11% annual returns over three and five years. It recently traded at a 7% premium to its NAV.

Pimco Dynamic Credit & Mortgage Income (PCI): Paying 8.6%, PCI holds mortgage-backed securities. The fund has returned 14% over 12-months averaged 24% and 12% annual returns over three and five years. It recently traded even with its NAV.

Delaware Investments Dividend & Income (DDF): Paying 8.5%. DDF holds dividend paying common stocks and corporate bonds. Delaware returned 36% over 12-months and averaged 28% and 15% annually over three and five years. It recently traded at a 14% premium to its NAV.

BlackRock Science & Technology Trust (BST); Paying 5.8%, BlackRock holds most major U.S. and global tech players. Since most tech stocks dont pay significant dividends, BlackRock sells covered call options on its holdings to generate income. The fund, which only went public in October 2014, returned 19% over 12 months and averaged a 40% annual return over three years. It recently traded an 8% premium to its NAV.

As always, historical performance doesnt predict the future. Do your own research. The more you know about your funds, the better your results.

published 2/18/19

 

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