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At High Dividend Opportunities, our goal is to build a high level of current income through dividends. Dividends provide the flexibility to redirect the income into other profitable investments, or they are used by many as retirement income or spending money. To ensure stability, we encourage having a very diverse array of dividend-paying investments.
There are many types of investments that income investors can turn to – one structure that's particularly favorable is closed-end funds or CEFs. These funds have a lot of great benefits for an income portfolio. They provide a high level of income and provide instant diversification, making the CEF a critical tool to have in your income-producing toolbox.
What Are CEFs?
A closed-end fund has many similarities to open-ended funds like mutual funds or exchange-traded funds (ETFs). All funds are run by an investment advisor that hires a management team to actually manage the investments. Funds will make income and capital gains distributions to shareholders and the advisor will charge a fee based on the amount of assets under management.
The key difference between a CEF and open-ended funds (such as Mutual Funds or many ETFs) is that a CEF raises capital at inception through an IPO. From then on, a fixed number of shares will trade on the secondary market. Open funds will issue new shares to investors and redeem or buy back shares, keeping their share price trading very close to the net asset value ('NAV') of their holdings. While CEFs can buy back shares in the open market or may do a secondary or rights offering, these are done in a manner similar to a publicly-traded corporation.
As a result, CEFs will frequently trade at a premium or discount to their NAV. We see CEF prices frequently influenced by the quality
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