High Yield Closed-End Funds Trading At Discounts To NAV

Includes: CSQ, DHG, EHI, NFJ, PDT, UTG
by: Tim Plaehn

For many investors, 2012 might be described as the year of flight to high-yield investments. There is more interest and money going into high-yield choices than at any point in time that I can remember. The yield stampede has put a spotlight on closed-end funds which pay attractive dividends. An issue with the high yield CEFs is that the buying has pushed many funds to trade at significant premiums to actual net asset value - NAV. A recent Barron's article highlighted the dangers of closed-end funds trading at a premium and it appears the article might have caused a sell-off of some of the funds with the highest premiums. A couple of the big Pimco CEFs had their premium shrink from the 70% discussed in the article down to the 40% range.

To help with the search for relatively safer high yield CEFs, I scanned my database of high yield funds looking for those which have provided returns at or near the top of their respective categories and are currently trading at a discount to NAV. The list of funds that I follow include CEFs with yields above 6% and at least $200 million of market value. Here is a handful of funds you might want to consider for both income and growth potential.

Equity Funds

  • John Hancock Premium Dividend Fund (NYSE:PDT) has a 6.4% dividend yield and currently trades at a 2% discount to NAV. PDT has provided an excellent long term return to investors with an average annual return on NAV of 21.7% for the last three years and 11.5% over the last 10 years. The most recent distribution increase was in mid-2010.
  • Calamos Strategic Total Return Fund (NASDAQ:CSQ) currently yields 8.2% and trades at a 4% discount to NAV. The fund's average annual return was 10.6% for the last three years. The CSQ monthly dividend was increased by 33% in February 2012. However, recent distributions have included about one cent of return of capital out of the 7 cents being paid. Calamos offers an attractive dividend reinvestment plan for its closed end funds.
  • Reaves Utility Income Fund (NYSEMKT:UTG) has a current yield of 6.2% and the shares are at a 1% discount to NAV. The dividend rate increased by a penny in September to 12.5 cents monthly. It is not uncommon for the UTG distribution to be a combination of income and short-term capital gains. The fund has produced a 24.5% average return for the last 3 years and 10.8% since inception in February 2004.

Income Funds

  • DWS Dreman Value Income Edge Fund (NYSE:DHG) is the only high-yield bond fund in my database traded at a discount - 1% - to NAV. The fund has a current dividend yield of 7.8% and has produced an average annual return of 14.3% on NAV over the last three years. In June 2012, the monthly distribution was reduced to 10.4 cents from the previous 11 cents per share.
  • Western Asset Global High Income Fund (NYSE:EHI) trades at just a couple of cents below the NAV and sports a 8.3% yield. EHI was the top performing global income fund in my database for the last three years, with an average annual NAV return of 14.2%. The distribution rate has remained level since the end of 2010.


I reviewed several funds with higher yields - 10% plus - for this article and I believe the negative factors outweighed the potential extra income from a higher dividend. For example, the NFJ Dividend, Interest & Premium Strategy Fund (NYSE:NFJ) has a current yield of 10.8% and trades at a 5% discount to NAV. The problem is that 71% of distributions over the last year have been return of capital and the full amounts of the two most recent quarterly dividends were ROC.

The five closed-end funds listed above provide distribution yields in the 6% to 8% range with potential for some capital appreciation. The funds in the CEF universe sporting double-digit yields put investors at risk of either collapsing share price to NAV premiums or eroding NAV values as funds support distributions with payouts of capital. I believe that sticking with the lower yield choices will provide superior return results over the next couple of years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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