Nuveen AMT-Free Municipal Credit Income Fund Offers 5.50% Tax-Free Yield
- NVG offers 5.50% tax-free yield, paid monthly.
- The fund has high credit quality, but long duration.
- The fund is at a -9.03% discount to net asset value.
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Start your free trial today »
This article was first released to subscribers 2 weeks ago. This article was co-produced with Triple F Fred.
Today, I will profile a large CEF municipal fund with several interesting attributes. My efforts with Stanford Chemist's Income Laboratory will be focused on the RIC classification companies within the investing universe. The Regulated Investment Companies are required to pay out 90% of earnings to shareholders or pay a significant penalty. Many idiosyncrasies exist in these funds and we will work to explain how to capitalize on these issues as we go.
This arena is where I specialize as often there are inefficiencies available where an investor can produce outsize income streams. 5% yield and up is the target as right now my focus is on safety and predictability of cash flow.
Many investors overlook these companies due to the lack of understanding surrounding this arena of Regulated Investment Companies. We will work together to clear away the smoke often hanging over these income generating entities. Never hesitate to ask questions if my descriptions are not clearly articulated and I will do my best to clarify.
Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG)
Nuveen's NVG fund is a large $5.064 billion CEF focused on the US municipal bond market. The fund description as provided from Nuveen is below:
The fund's investment objectives are to provide current income exempt from regular federal income tax and to enhance portfolio value relative to the municipal bond market by investing in tax-exempt municipal bonds that the fund's investment adviser believes are underrated or undervalued or that represent municipal market sectors that are undervalued. The fund invests in municipal securities that are exempt from federal income taxes. The fund uses leverage. By investment policy, the fund may invest up to 55% of its managed assets in municipal securities rated at the time of investment Baa/BBB and below or judged by the manager to be of comparable quality.
The fund provides a current yield of 5.50% that is completely federal income tax AND AMT (federal auxiliary minimum tax) FREE. Tables are readily available that will show the taxable equivalent yield according to you particular tax situation (the below table is an example). Main point: No federal income tax and a 5.5% yield paid monthly!
(Source: Russell Investments)
Bonds rated A-AAA make up 49.9% of their holdings and BBB plus over 72%, so overall a very smartly rated group of bonds.
The fund trades 425,000 shares daily on average and over $6 million so the liquidity is excellent. It uses 40% leverage and charges a baseline expense ratio of 1.04%. This is a fairly large fund with about $3.2 billion in net assets and $5.0 billion in total assets.
These are the top 5 states for NVG:
The sector allocations for NVG are reproduced below:
The fund has a relatively high duration of 9.06 years and a leverage-adjusted effective duration of 14.20 years. The effective maturity is 21.71 years. This duration should be borne in mind by potential investors, as it will make the fund more susceptible to changes in interest rates both on the upside and downside.
The z scores are 3 months, 1.60; 6 months, 0.40; and 1 year, 0.20. There is some trading range so opportunity to trade the fund exists, although swings have not been excessive. It appears most of the trading differential has been around the small dividend changes in a fund which is paid on earnings. As you can see by looking at the "price charts" of the last few weeks, there is ample opportunity to get in or out of this fund at advantageous pricing.
The price is at a -9.03% discount to net asset value less than .40% deviation from yearly average. The 5-year premium/discount history of NVG is shown below.
The changes from inception till now (15 years+) are barely over $.02 from extreme to extreme. Also, the accrued overages associated with pay from earnings are paid in a special dividend at the end of the year.
The following chart shows the distribution history of NVG since inception.
CEFConnect is the primary source used to provide the data seen in this report. You can access the income tax equivalent calculator available on this site in the distributions section of the data pages on this CEF ticker "NVG".
According to CEFdata, the fund has earnings coverage of 96.49% and UNII of $-0.027. The earnings coverage figure is confirmed by looking at the fund's most recent annual report (dated 10/31/2018). In 2018, the fund earned $0.81 in net investment income against $0.84 in distributions, corresponding to 96% coverage. It is also pleasing to see the trend in NII has been generally upwards, from $0.71 in 2014 to $0.81 in 2018. This has allowed the distribution to grow slightly as well.
(Source: NVG annual report, 10/31/2018)
Municipal bond funds are considered to be among the safest investment grade funds available. NVG has an excellent rating schedule and is very diversified. Its size and Nuveen's credibility as a fund provider gives us some additional security/safety due to their reputation. The federal tax free status is a big plus to many investors and particularly due to being able to hold in a taxable account where you can access funds without an early distribution penalty.
Ideas presented are my own and ARE NOT a recommendation to buy or sell discussed entity. My activities within my own account are on me and my own Due Diligence procedures. I will discuss my ideas and actions on this forum but do understand I have several decades of experience in the financial markets and what is good for me may or may not be appropriate for others. I will make effort to answer all questions in a timely manner and look forward to lively discussions. I recently added this fund to my taxable portfolio and have no plans to buy or sell over the next 72 hours.
My thanks for reading my ramblings and especially to Stanford Chemist for providing his forum for exposure to your inputs on this entity. I do look forward to many future opportunities to share ideas with our group here at The Income Laboratory on investments.
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Our team includes:
1) Stanford Chemist: I am a scientific researcher by training who has taken up a passionate interest in investing. I provide fresh, agenda-free insight and analysis that you won't find on Wall Street! My ultimate goal is to provide analysis, research and evidence-based ways of generating profitable investing outcomes with CEFs and ETFs. My guiding philosophy is to help teach members not "what to think", but "how to think".
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4) Dividend Seeker: Dividend Seeker began investing, as well as his career in Financial Services, in 2008, at the height of the market crash. This experience gave him a lot of perspective in a short period of time, and has helped shape his investment strategy today. He follows the markets passionately, investing mostly in sector ETFs, fixed-income CEFs, gold, and municipal bonds. He has worked in the Insurance industry in Funds Management, helping to direct conservative investments for claims reserves. After a few years, he moved in to the Banking industry, where he worked as a junior equity and currency analyst. Most recently, he took on an Audit role, supervising BSA/AML Compliance teams for one of the largest banks in the world. He has both a Bachelors and MBA in Finance. He is the "Macro Expert" of the CEF/ETF Income Laboratory.
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