With checking and saving accounts paying next to nothing and CD rates near all-time lows, getting any interest on one’s money is a great challenge. While there are many different investment options available providing yield, it is hard to find guaranteed investments which pay any kind of return in today’s marketplace.
Non-guaranteed options are definitely available, but the landscape becomes more complicated as one searches for increasingly profitable yield choices. Dividend paying stocks are a solid alternative, but determining the criteria to purchase stocks can be challenging and quite often the yields are just fair. Mutual funds are also available, and they provide more diversification than individual stocks, but the fees can be costly and quite often these are more effective as long term plays. closed-end funds (CEF’s), however, can serve as an interesting alternative when searching for yield.
Many CEF’s yield above 6% after fees. Investors, however, must be aware of ex-dividend dates and whether or not the fund is trading at a discount or premium to its NAV. If an investor purchases a stock on its ex-dividend date or after, he or she will not receive the next dividend payment. Instead, the seller gets the dividend. If, however, an individual purchases the stock or fund before the ex-dividend date, he or she will receive the dividend. “Net asset value,” or “NAV,” of an investment company, on the other hand, is the company’s total assets minus its total liabilities. For example, if an investment company has assets worth $100 million and has liabilities of $10 million, the investment company’s NAV would be $90 million. Because an investment company’s assets and liabilities change daily, NAV will also change daily. NAV might be $90 million one day, $100 million the next, and $80 million the day after.
After a closed-end funds initial public offering, the fund trades on what is referred to as the secondary market. Buyers and sellers then determine the price of the CEF, and the fund can be trading at a discount to NAV or at a premium to NAV. One of the primary strategies revolving around the trading of closed-end funds is to purchase them on sale or at a discount to NAV. When the fund is actually worth more than the market price, investors love to get a dollar for .90 cents on a CEF with a 10% discount to NAV.
PCI, PIMCO Dynamic Income, is a CEF that is run by an outstanding management team. At the time of this writing, PCI trades for a 5.77% discount to NAV and has a distribution rate of 9.89%. PCI pays monthly so an investor must purchase the fund prior to its ex-dividend date to receive the dividend. Determining the ex-dividend date, the discount to NAV and the distribution rate of a closed-end fund give an investor an excellent start to making an investment decision in the CEF space. Building a diversified portfolio of closed-end funds is challenging but can be lucrative as well. For more information on closed-end funds and/or investing in general, contact us at Innovative Investment Solutions, Inc.
IMPORTANT CONTENT DISCLAIMER
The information presented and made available in this article is intended for educational purposes only. The information is not and should not be confused with investment advice and does not attempt or claim to be a complete description of any specific securities or markets. This information is of a general nature and has not been prepared with regard to any particular person’s investment objectives, financial situation and/or particular needs.
The opinions and analyses included herein are based on sources and data believed to be reliable and are presented in good faith; however, no representation or warranty, expressed or implied is made as to their completeness or accuracy. It is imperative to understand your investment risks since all stock and option investments involve significant risk. The risk of loss in trading securities and options can be substantial.