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Some time ago (September, 2011 to be exact) I wrote about what I proposed as a "perfect" income investment. I was talking about closed-end fund preferreds. They are protected in that the fund must maintain a 2:1 asset/preferred share ratio (www.nuveen.com/CEF/Learn/Step2.aspx) or sell assets to redeem the preferred. As the underlying asset is a publically traded security with excellent liquidity, the chances of a capital loss below par are very low in the long run.

That brings me to the current topic. Master Limited Partnerships (MLPs) are certainly in vogue, and have been for some time, due to the strong and increasing dividends as well as their equity price gains. I have enjoyed a nice, safe monthly dividend with a closed-end fund that tracks MLPs, namely the Tortoise Energy Infrastructure Corp. (NYSE:TYG). This is a closed-end fund with $1.6 billion in total assets. The preferred series A shares pay a dividend of $0.625 per year, in monthly installments. This translates to a 6% yield at current prices, with very secure assets underlying the issue (stocks of MLPs). The shares must be redeemed by the fund on December 31, 2019 at par ($10.00 per share). With just that information, based on your feelings about interest rates, this looks like a pretty secure way to lock in 6% dividends for the next 7+ years (less a $0.47 capital loss at call).

Is this still a good investment despite the optional redemption that kicks in on December 31, 2012. After that date, the fund has the option of redeeming shares at a price of $10.10 for 2013 (pdf), $10.05 for 2014 and $10.00 starting in 2015. This now presents a capital risk of $0.37 per share, or 3.5% against scheduled dividends of 4% through January 1, 2013. Worst case, through the beginning of next year, you would earn 0.5% if called. If not called, you would continue to receive your monthly dividends as scheduled. Is this a good investment?

I come down on the side of: there are better closed end preferreds out there, if that is your cup of tea.

Source: The Perfect Income Security: An Update On Tortoise Energy Infrastructure Preferred CEF