KIO And The Beauty Of Closed-End Fund Leverage

Summary

  • One of the reasons KKR Income Opportunities Fund can pay out 7.8% distributions with over 100% earnings coverage is cheap institutional leverage that costs it less than 1% per annum.
  • The "naked yield" on its investment portfolio (without the benefit of leverage) is 7.3% (and even lower, 6%, after fund expenses unrelated to leverage).
  • But with the advantage of leverage, that yield on shareholders' investment, after all expenses including the cost of the leverage itself, jumps to 8.5%.
  • Even higher (8.8%) for shareholders purchasing at the current 3.6% discount.
  • I have called this the "alchemy" of closed-end funds, but whatever you call it, it's why so many investors have been attracted to CEFs as an investment vehicle.
  • Looking for more investing ideas like this one? Get them exclusively at Inside the Income Factory. Learn More »
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Steven Bavaria has 50 years of international banking and credit, journalism, and investing experience. A graduate of Georgetown University and New England School of Law, he was an executive at Bank of Boston and Standard & Poor's. His Income Factory® philosophy, outlined in his book “The Income Factory”, is designed to maximize cash income with peace of mind in all market environments.

Steven's Inside the Income Factory investing service lets hundreds of members learn and implement an Income Factory strategy alongside him. The Income Factory creates its own growth by reinvesting and compounding the "river of cash" generated by its high-yielding portfolio.  That income continues to grow through all sorts of markets - up, down, or sideways. Other features include a chat room, model portfolios, and ongoing insights into Steven's personal portfolio and his view of current economic and market trends.

Analyst’s Disclosure:I/we have a beneficial long position in the shares of KIO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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