Are These High-Yield Funds Right For You?

by: Paul Zimbardo

The market has finally regained a point that we have not witnessed since April 2008: Dow 13,000. Do you think that the market rally is overdone? Do you want to lock-in some profits and avoid the intense volatility that we have been witnessing recently? With the economic and political climates only becoming more tumultuous I have been concentrating on high yield opportunities. We all know about the blue-chip dividend companies but there are attractive funds with high yields that are going ex-dividend every week. This strategy can work in one of two ways: either you buy before the ex-date to receive the dividend or buy after if the stock declines far below the after-tax amount of the dividend. Regardless of your short-term strategies, these funds can really be attractive longer-term investments depending on your individual circumstances.

To focus on these opportunities I ran a screen with a focus on relative safety for the investments. I began with a specification of a dividend yield greater than five percent and an ex-dividend date within the next week. This week I wanted to turn my attention to smaller high-yield focused funds so I set my screener to look for market capitalizations between $250M and $1B, PEs between zero and 20, and institutional holding percentage of less than 30 percent. Please note that this is a divergence from my typical weekly ex-dividend screener criteria. While not a precise requirement, I prefer companies that have underperformed the S&P 500 (NYSEARCA:SPY) in the last 52 weeks as it indicates limited downside relative to peers. This is summarized below:

  • Dividend Yield ≥ 5.0%
  • Ex-Dividend Date = Next Week
  • Market Capitalization ≥ $250M-$1,000M
  • PE Ratio: 0-20
  • Institutional Ownership ≤ 30%

After applying this screen I arrived at the funds discussed below. Although I envision these as short-term trading ideas, you still need to be careful. The information presented below should simply be a starting point for further research and should not be taken as a recommendation. My goal is to present new companies to you and provide a brief overview of their recent developments and this should not be considered a substitute for your own due diligence.

BlackRock Income Trust (BKT): 6.49% Yield - Ex-Dividend 4/12

The BlackRock Income Trust is a closed-end fund with the objectives of "both preservation of capital and high monthly income." BKT seeks to achieve these goals by investing primarily in mortgage-backed securities ("MBS"). Given the state of the housing market it is only natural to be leery of funds that focus on MBS; however, BKT invest primarily in agency securities issued by Fannie Mae (OTCQB:FNMA) or plain vanilla U.S. Treasury bonds. 85% of the 12/30/2011 portfolio was invested in mortgage backed securities with the remainder in U.S. government securities and cash. Overall credit quality of the underlying investments was 97.3% AAA rated or above. Furthermore, the monthly distribution has been steadily growing and nearly doubled in 2011.With a 6.5% yield, similar discount to NAV, and portfolio of assets backed by the U.S. government, what more could you ask for?

Calamos Convertible & High Income Fund (CHY): 8.15% Yield - Ex-Dividend 4/9

Calamos High Income fund describes itself as "enhanced fixed income offering" that strives to offer a predictably steady level of cash flows by investing primarily in convertible securities and high-yield corporate bonds. To achieve its lofty eight percent dividend the fund invests primarily in corporate bonds, convertible bonds and convertible preferred stock. Among those securities there is decent industry diversification but the majority of investments are in energy, consumer discretionary, information technology [the single largest investment as of 2/29/12 was an Intel (INTC) convertible bond], and industrials. The alarming part of this fund is its reliance on lower-quality securities. Only approximately 20 percent of the portfolio is invested in investment grade securities (BBB or greater) with the vast majority holding BB or B ratings. This is not necessarily a bad thing as investors know more risk entails more reward; however, this is not the type of fund for me. The yield is very respectable but I believe you can find similar yields with a less risky fund or equities.

The fund's fees are a bit steeper than I usually like for funds that I invest in (1.2%) but it is palatable. Unlike BKT, the dividend has been flat since prior to 2010 as the fund's objective is a stable payout.

Dreyfus Strategic Municipal Bond Fund (DSM): 6.53% Yield - Ex-Dividend 4/12

The closed-end municipal ("munis") bond fund seeks to maximize exempt-interest dividends, which are "not generally subject to regular federal income tax." Munis are investments in local government entities that typically offer lower returns with the strong benefit of avoiding federal income tax, which makes them preferable for investors in high tax brackets. Note that not all distributions from these funds are exempt from federal income tax so please consult your accountant and financial advisor before making an investment decision regarding this fund. Based upon the fund summary (pdf) as of 12/31/11, some of the performance is subject to federal Alternative Minimum Tax.

As a municipal bond fund the sectors you would expect for a local government are highly represented: healthcare, transportation, education and utilities (water/sewer and electric). The most highly represented state by far is California (15.7%), which is alarming as the state continues to face one of the weakest economies due to its reliance on the housing market. The fund only invests in securities initially rated investment grade (or the Dreyfus-rated equivalent when not rated) and nearly 75% are rated A or higher. Overall this fund appears to be average with both pluses and minuses but can be a very solid investment if you can take advantage fully of the tax benefits.

Neuberger Berman High Yield Strategies Fund (NHS): 7.99% Yield - Ex-Dividend 4/12

The Neuberger Berman High Yield Fund invests in high-yield debt securities to generate high total returns from below investment grade securities. As of 12/31/11 substantially all investments were in BBB, BB, B, or CCC rated securities. There is significant industry diversification but there is some concentration among telecom, energy, commercial leasing, and cable media sectors. The distribution history has remained relatively even despite declining from .11 to .10 monthly in July 2011. This fund offers a lower yield than the Calamos High Income fund discussed above despite investing in lower quality securities and having a higher ratio of expenses (1.68% vs 1.21%.).

Nuveen MLP & Strategic Equity Fund (MTP-OLD): 5.30% Yield - Ex-Dividend 4/11

The Nuveen Master Limited Partnership ("MLP") fund's objective is to provide a high level of after-tax total return by investing in publicly traded energy MLPs. MLPs are one of the most popular "sectors" because the companies with that tax structure pay no corporate tax if they distribute a predetermined percent of earnings. Instead the individual owners are taxed as partners, which creates its own complications that you should discuss with your accountant. As with most of the funds mentioned above, Nuveen strives to have consistent distributions although Nuveen makes distributions quarterly. The dividend recently climbed from less than $.10 to $.2375, where it will likely stay for the remainder of the year. I just characterized NHS' expenses as high but MTP tips the scale at 5.69% due to 4.72% of "other expenses." Investors will have to weigh the tax benefits of MLPs against the high expense ratios but I believe individuals would be better served picking a specific MLP rather than this fund.

The information presented has been summarized below - (click to enlarge).

Click to enlarge


I have no positions in any funds mentioned, and no plans to initiate any positions within the next 72 hours; however, my plans may change without notice.