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With rates still near record lows, it's hard to find a reasonably safe investment to earn an attractive return. However, there are some interesting places to get paid high yields if you look at closed end bond funds. Both of the two funds I found invest most of their portfolios in municipal bonds which are exempt from federal taxes. These funds trade at a premium to net asset value which means you should try to buy on dips.
Some investors are concerned that with all the budget deficits, some municipalities will default. Meredith Whitney recently predicted that there would be 50 to 100 municipal bonds defaulting in 2011 totaling hundreds of billions of dollars. However, Alexandra Lebenthal, President of Lebenthal & Co., and a well known muni bond expert does not agree with that assessment. Meredith Whitney made the prediction on December 19, and according to Lebenthal, only two muni bond issuers have defaulted since then, for a total of $12 million. This is far short of the extreme predictions made by Whitney. To see more about this from an interview on "Fast Money" see here.
The fears raised by Whitney seem overblown as municipalities can raise tolls, fees, and other taxes to increase revenues rather than default on their bond obligations. Some well known bond investors like Bill Gross "The Bond King" of Pimco, recently purchased some of his closed end muni bond funds so it might make sense to follow experts like Mr. Gross.
One reason you can find higher yields in certain closed end funds is because they use leverage (money borrowed at low rates which is invested in bonds that pay higher rates), so it is important to understand that this does have more risk as well as more reward. I have included the leverage used by both funds below.
Here are the two funds:
The Nuveen Muni High Income Opportunity 2 Fund (NYSE:NMD) is a good place to earn about 8.35% but, since this fund invests in municipal bonds which are exempt from Federal taxes, it is equivalent to about a 12.84% yield. This is a closed end bond fund managed by Nuveen with a current share price of about $10.78. NMD pays about 7.5 cents per share monthly.
NMD has most of its holdings (about 88%) in muni bonds and the rest in cash and derivatives. NMD has a management fee of about 1.5% and the effective leverage is around 38%. The fund has an average duration of 14.6 years. This fund is currently selling for a premium to net asset value which is now $10.44. This is equivalent to a 3.26% premium based on the current share price of $10.78. Due to it's generous yield, this fund has historically sold at a premium to the net asset value, but I would still wait to buy when the premium is lower.
The Nuveen Muni High Income Opportunity Fund (NYSEMKT:NMZ) is paying a yield around 8.64% but, since this fund invests in municipal bonds which are exempt from Federal taxes, it is equivalent to about a 13.29% yield. This fund is managed by Nuveen and has a current share price of $11.60. NMZ pays about 8.35 cents per share monthly.
NMZ has most of its holdings (about 90%) in muni bonds and the rest in cash and derivatives. NMZ has a reasonable management fee of about .95% and the effective leverage is around 41% This fund has an average duration of 14.7 years. This fund is currently selling for a premium to net asset value which is now $10.56. This is equivalent to a 9.8% premium based on the current share price of $11.60. Due to it's generous yield, this fund has historically sold at a premium to the net asset value, but I would still wait to buy when the premium is lower.
When buying closed end funds it is important to place limit orders and buy when these are trading at a discount or close to the net asset value. To get more information on current net asset values and other details on these funds, CEF Connect is a good resource.
Disclaimer: The data is sourced from Yahoo Finance and etfconnect.com. The information and data is believed to be accurate, but no guarantees or representations are made. Rougemont is not a registered investment advisor and does not provide specific investment advice. The information contained herein is for informational purposes.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: Two CEFs Offering Tax Equivalent Yields of 13%