How do CEFS pay high dividends?

Many closed-end funds employ leverage, meaning they borrow funds, to increase returns . The math works like this. Say you can borrow money at a 3% short-term rate and invest it in longer-term assets returning 7%. Using those numbers, you're making 4% annually on the borrowed funds.

How to invest in CEF?

With a closed-end fund, investors buy the fund by purchasing shares in the secondary market through their brokerage account , just like they would for an individual stock or ETF. Demand to buy or sell shares of closed-end funds leads to price fluctuations in those shares.

How is income from a CEF taxed?

Generally, shareholders of closed-end funds must pay income taxes on the income and capital gains distributed to them . Each closed-end fund will provide an IRS Form 1099 to its shareholders annually that summarizes the fund's distributions.

What is the downside to closed-end funds?

Investing in closed-end funds involves risk; principal loss is possible . There is no guarantee a fund's investment objective will be achieved.

Are CEFs a good investment?

Most are seeking solid returns on their investments through the traditional means of capital gains, price appreciation and income potential. The wide variety of closed-end funds on offer and the fact that they are all actively managed (unlike open-ended funds) make closed-end funds an investment worth considering .

Which is better CEF or ETF?

CEFs, while costing more because they are mainly actively managed, can trade at a discount to their NAV. Investors looking for standard, safer investment strategies would do well choosing an ETF, whereas investors looking for alpha returns may do better with a CEF .

What is a good Z score for a CEF?

Z-score can also help investors uncover potentially truly undervalued and overvalued CEFs. If the z-score is greater than +2 or less than -2 , more research would be warranted.

Why do CEFs have high yields?

In the current environment, CEFs trade at historically large discounts, double digits in many cases. In other words, you can buy $1 worth of assets for 90 cents or less. And by paying a lower price , an investor gets a higher yield; you get the income from the full dollar of assets, for which you paid only 90 cents.

How do closed-end funds make money?

A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments . Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.

Are CEFs better than ETFs?

CEFs, while costing more because they are mainly actively managed, can trade at a discount to their NAV. Investors looking for standard, safer investment strategies would do well choosing an ETF, whereas investors looking for alpha returns may do better with a CEF . Fidelity. "Closed-end Funds vs.

Green's Portfolio: CEF Update, Powering Income For 2022 (2024)

Green's Portfolio: CEF Update, Powering Income For 2022 (1)

Through the many years of managing my own investments, I've owned and traded stocks, mutual funds, options and others. Over time, for my skills and time, and for consistency and performance, I've ruled out investing in mutual funds and options. For the past 5 years in retirement, I have tweaked a strategy that involves generating income from CEFs, REITs, and some high-dividend stocks, combined with swing and position trading of stocks. That stock trading strategy, as I have demonstrated through articles about my current portfolio (February to September 2021), focuses primarily on trading under-performing S&P 500 companies in under-performing sectors. Many trades are based on technical weakness, especially gaps below the daily 200 moving average in stock prices associated with earnings events. From February through September I closed 81 consecutive profitable stock trades for a median gain, including dividends, of +36.4% or +30.8% (cost-weighted) for 6.0 months (median) in the trade.

I still actively employ this two-part portfolio strategy, as I never want to put all of my eggs in one basket. Diversification and limiting my allocation to individual holdings are the ways that I have chosen to manage risk.

As I have written before, for me, the most important question to answer for my investments is "how am I going to get paid and when?" CEFs in particular provide an answer that I really like.

CEFS Are the Cornerstone of My Portfolio

I like CEFs for a number of reasons:

CEFs are well-regulated (SEC) and professionally, actively managed.
CEFs typically have relatively small capitalizations, such that institutional investors don't play in this space and distort/influence price.
CEFs are generally high yield, often >6%, and while management fees can be high, distribution yields are net of fees.
CEFs often effectively use leverage to "juice" returns, taking advantage of cheap borrowing.
Many CEFs pay monthly dividends (distributions), which compound faster if re-invested [DRIP].
Many CEFs have stable distributions (some for decades) regardless of the share price fluctuations of the underlying assets, which is a 'SWAN' factor, especially for retirees.
With fixed numbers of shares, CEFs can trade at discounts to their Net Asset Value [NAV], the actual value of the underlying assets.
CEF funds provide plenty of diversity, with equity, bond, and hybrid funds; US, global, and international allocations; sector concentrations; and AMT-free funds ("munis").

Most important for me, CEFS are my top asset class for generating higher-yield income in retirement. They work especially well in an era of commission-free trading and in my Roth IRA wherein any income and gains are not taxed.

Pay Me Now

I don't currently need to withdraw funds from my retirement investments, but I never know when that day may come, or when my account will see its final transfer (tax guru Ed Slott's "last limousine ride"). So I like the idea of bringing profits home along the way instead of waiting for some future payouts. The risk of waiting for future payouts is that the market may be in a correction or recession, and I could lose a significant amount of my "unrealized" gains. Investors only have to remember the spring 2020 COVID selloff, for which the S&P 500 dropped 35%, or the 2008-9 Great Recession when the market sold off 57%. Then there was the "lost decade" of the early 2000s (actually 2000 to 2013), when the S&P was essentially flat for the entire period. High-flying stocks (e.g., tech and the like) that pay no dividends and for which the lofty gains are always unrealized ("paper") until the stocks are sold, incur the risk of a price correction. And now we have markets propped up by huge infusions of cash while amassing debt.

With CEFs, I can potentially get a greater percentage of my ending investment returns from dividends (distributions) collected along the way and through re-investment. For example, the Calamos Strategic Total Return Fund (CSQ) has returned an average annual return of 5.67% since 2005 (inception was in spring 2004), but with dividend reinvestment the average annual return was 11.06%. This compares to 9.15% for the S&P 500 (using the SPDR ETF, SPY) for the same period and 10.43% per year with dividend reinvestment. So CSQ has not only slightly outperformed SPY for the past 17 years on a Total Return basis, but it has also generated greater realized income (distributions). Moreover, because CEFs can trade at discounts to NAV, I can also carry an unrealized gain whenever my average unit cost is below the current market price. With CSQ, my unit cost is $15.14 compared to current share and NAV prices of $19.40 and $18.92, respectively (as of close on 12/30/21) and 52-week averages of $17.87 and $17.54, respectively (data from CEFConnect). It's hard not to like an investment for which my unrealized gain is 28% and that pays me monthly at an annual distribution rate of 6.3%.

I cover the current performance of my CEFs below, but CSQ is not the only fund that has paid me well along the way. The top 10 most profitable CEFs currently in my portfolio are up an average of 34.6% over cost and have an average distribution yield of 6.98%. And the 10 most profitable CEFs in my portfolio over the past 4 years have paid me a total of >$22k in income.

Many CEFs are known for the stability of their distributions regardless of the fluctuations in share prices over the years. One example of stable distributions that I like is the utility and energy fund, DNP Select Income Fund (DNP):

(Source: CEFConnect.com)

I also like other funds for which the distributions steadily increase, such as for the Reaves Utility Income Fund (UTG).

How I Invest In and Trade CEFs

I am an incremental trader/investor. I open trades with a relatively small allocation of capital and then trade based on price action. I look to add to positions on price dips, averaging down the unit cost. To the extent possible, each add is for shares at a new lower cost, or at least below my average unit cost. This means that for some of my CEFs, the position size is smaller if share prices rise markedly from my entry cost. As long as CEFs continue to generate income, I'm mostly happy to let them run, but I occasionally sell some highest cost shares as prices climb to new highs. This keeps my unit cost lower on a running basis. Depending on share prices and my cash balance, I adjust whether I re-invest dividends in each CEF or not, but generally employing DRIP allows returns to compound more quickly. These are general guidelines and not hard-and-fast rules.

For selecting CEFs, I look at data on websites such as CEFConnect (even with occasional data errors, most of which are obvious), I read articles by SA Contributors, I follow articles [free] and a portfolio from Contrarian Outlook, and I look at the individual funds' websites. As I have written before, I look to buy funds to the extent possible when they trade at a discount to NAV (>5% is a good entry point), funds that have assets under management of >$300 M, and funds for which distributions over time are mostly stable or increasing. I also prefer funds where leverage is <35% (with a few bond fund exceptions) and that do not regularly exhibit a destructive return of capital [ROC]. I like to hold a large number of CEFs just as I do for individual stocks.

I am a relatively new investor in CEFs, having only learned about them in 2017. In the past few years I have allocated more capital to CEFs as part of my annual rollovers to my Roth IRA, as well as maintaining a cash reserve for swing trading. My investment has grown to the extent that at the end of 2021 I now hold >15,500 shares across 46 CEFs. As explained below, many of these are recent adds to my portfolio, so I expect that I will significantly increase the number of shares throughout 2022. Even now, CEFs represent the 10 largest holdings in my portfolio and these 10 account for 18.4% of portfolio investment.

4Q 2021 Changes

During 4Q I completed another rollover from my 457 retirement plan to my Roth IRA, set aside additional money to pay the taxes, and then continued to add new funds, add shares to existing funds, and take a profits on my highest cost shares of a few funds. Overall, I made changes to 37 CEFs from October through December 2021:

I increased my total investment in CEFs by 67.8%, with a 53.9% increase in the number of CEF shares.
I sold a few highest cost shares for GDV and RQI.
I sold my remaining shares in Blackstone Long-Short Credit Income (BGX) and Duff & Phelps Utility & Infrastructure Fund (DPG).
I added shares to 16 existing CEFs: AOD, BDJ, BIGZ, BIT, BST, BSTZ, CPZ, DNP, DSL, GDV, HYT, RVT, THQ, USA, UTF, and UTG.
I re-entered positions for Boulder Growth & Income (BIF) and Western Asset Emerging Markets Debt (EMD) on recent dips.
I opened new positions in 16 CEFs: ADX, BCAT, BCX, BMEZ, BOE, CII, DLY, ECAT, EOS, HQH, KF, NPCT, PDI, PDO, QQQX, and RMT. I list these later.

Current CEF Portfolio

These changes increased the number of CEFs in my portfolio from 30 at the end of September to 46 at the end of December. The total number of CEF shares is now >15,500, with a wide range in the number of shares across funds. This is still not a large CEF portfolio compared to what many investors surely hold, but it is growing rapidly.

By investment cost, CEFs now comprise about 31% of the portfolio, with a smaller allocation to REITs (about 7%). Stocks are still the largest allocation, at about 40.5%, and about 21.5% remains in cash. Excluding the cash reserve, CEFs accounted for 39.3% of the portfolio at the end of December.

(Source: author)

Largest CEF Positions

The 7,700 shares in these 10 largest CEFs by cost comprise 51.6% of total CEF investment and 20.3% of the entire portfolio investment. They are net profitable (market close on 12/30), at 5.6%, and have an average distribution yield of 6.88%.

DoubleLine Income Solutions Fund (DSL)
Reaves Utility Income (UTG)
BlackRock Science and Technology Trust (BST)
Tekla Healthcare Investors (HQH)
Cohen & Steers Quality Income Realty (RQI)
DNP Select Income (DNP)
BlackRock Enhanced Equity Dividend (BDJ)
BlackRock Innovation & Growth Trust (BIGZ)
Gabelli Dividend & Income (GDV)
BlackRock Multi-Sector Income Trust Fund (BIT)

These 10 CEFs include ones that I have owned for several years, such as DSL, and others that are new to the portfolio, such as HQH. In the table below, the month/year that I opened the positions is presented, as well as the current unit cost per share, the last price, and the current distribution yield. All data are as of the market close on 12/30.

CEF	Opened	Unit Cost	Last Price	Yield
DSL	Mar-18	19.235	16.08	8.26%
UTG	Jul-20	33.193	35.20	6.43%
BST	Jul-21	50.996	49.64	6.04%
HQH	Nov-21	24.647	24.18	8.48%
RQI	Nov-19	13.452	18.19	5.33%
DNP	Mar-20	10.367	10.91	7.12%
BDJ	Jul-20	8.353	10.15	5.94%
BIGZ	Jul-21	17.760	14.42	8.43%
GDV	Nov-19	20.299	27.02	4.87%
BIT	Feb-19	16.369	18.52	7.93%

As I hold CEFs for continuing income, the market price at any particular time is not really that important, as prices will fluctuate. In addition to the price component, the dividends (distributions) need to be included. So while it appears that I have an unrealized loss for DSL based on share price, I have actually collected $6.724 in dividends per share since 2018. Of course, the number of shares of DSL in my portfolio has changed through time, so that's not a cumulative income return of $6.724 for the number of shares that I currently own. But overall, including forever tax-free dividends, I am net positive for my position in DSL by a comfortable margin. This is the general case across my CEF portfolio.

Most Profitable CEFs

CEFs are not always a tradeoff between income and price gains, especially if purchased during market pullbacks or, more technically, at discounts to NAV. The 3,000 shares across my 10 most profitable CEFs have a current cost-weighted price gain of 34.6% and have an average distribution yield of 6.98%. Two of these funds, GDV and RQI, are included in the list of largest funds above.

Eaton Vance Tax Advantaged Global Dividend Income (ETG)
Eaton Vance Tax Advantaged Dividend Income (EVT)
Gabelli Equity Fund (GAB)
Cohen & Steers Quality Income Realty (RQI)
Liberty All-Star Equity Fund (USA)
Gabelli Dividend & Income (GDV)
First Trust Enhanced Equity Income (FFA)
Eaton Vance Enhanced Equity Income (EOI)
Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY)
Calamos Strategic Total Return (CSQ)

All 10 of these CEFs were added to my portfolio before 2021, and most prior to the post-COVID rebound, so they've had time for price gains with the rising markets. In the table below, the month/year that I opened the positions is presented, as well as the current unit cost per share, the last price, the percent cost gain to date, and the current distribution yield. All data are as of the market close on 12/30. These unrealized price gains do not include the distributions collected over the past few years.

CEF	Opened	Unit Cost	Last Price	Cost Gain	Yield
ETG	May-19	15.447	22.67	46.76%	6.89%
EVT	Oct-20	21.400	29.70	38.78%	6.62%
GAB	Jul-20	5.253	7.18	36.68%	9.97%
RQI	Nov-19	13.452	18.19	35.22%	5.33%
FFA	Oct-20	16.253	21.95	35.06%	5.81%
USA	Feb-20	6.287	8.39	33.45%	10.00%
GDV	Nov-19	20.299	27.02	33.11%	4.87%
EOI	Aug-20	15.376	20.14	30.98%	6.55%
ETY	Jul-20	11.454	15.00	30.95%	7.46%
CSQ	May-19	15.144	19.40	28.11%	6.32%

Especially for some equity CEFs, not only do they increase in share price due to holding growth stocks, but they also throw off increased distributions. A good example is CSQ, which has increased the monthly distributions twice (from $0.825 to $0.1025 per share) for a total increase of 24.2% since I entered the position in spring 2019.

Recently-added CEFs

Since September I added 16 CEFs to my portfolio, with 5 added just this past month. As a result, the positions are far from being fully-established. To date, the 3,400 shares across these funds represent 24.7% of the CEF portfolio cost. They are net profitable on cost but by just under 1% at this time. The average distribution yield is 7.95%, but the yields for some funds are misleading. Because ADX pays the bulk of the distribution in one year-end payment, the stated yield under-represents the true total annual distribution. And while my TDAmeritrade 'Positions' table lists the yield for PDO as 30.28%, other sources indicate that the yield is actually 7.29%.

Adams Diversified Equity Fund (ADX)
BlackRock Capital Allocation Trust (BCAT)
BlackRock Resources & Commodities Strategy (BCX)
BlackRock Health Sciences Trust II (BMEZ)
BlackRock Enhanced Global Dividend Trust (BOE)
BlackRock Enhanced Capital & Income (CII)
DoubleLine Yield Opportunities Fund (DLY)
BlackRock ESG Capital Allocation (ECAT)
Eaton Vance Enhanced Equity Income II (EOS)
Tekla Healthcare Investors (HQH)
Korea Fund (KF)
Nuveen Core Plus Impact Fund (NPCT)
PIMCO Dynamic Income Fund (PDI)
PIMCO Dynamic Income Opportunities Fund (PDO)
Nuveen NASDAQ 100 Dynamic Overwrite (QQQX)
Royce Micro-Cap Trust (RMT)

I chose to add these funds for several reasons. I completed another rollover to my Roth IRA and wanted to increase the diversification of my CEF portfolio. I also did research including reading a lot of articles here on SA, many of which found a lot to like for most of these funds. It's obvious that I agree that the folks at BlackRock are capable fund managers given that I added another 6 of their funds. Several of these funds are newer and are selling off, and the sentiment seems to be that perhaps investors don't understand these funds, hence the widening discounts. The discounts are providing a good buying opportunity, in my view.

The table below presents these funds and the date added to my portfolio, my current unit cost, the last share price, the distribution yield, and the percent discount or premium to NAV. All data are as of the market close on 12/30.

CEF	Opened	Unit Cost	Last Price	Yield	Dis./Prem.
ADX	Oct-21	18.805	19.48	0.92%	-13.65%
BCAT	Nov-21	18.734	19.24	6.57%	-7.99%
BCX	Nov-21	8.913	9.28	5.15%	-9.02%
BMEZ	Nov-21	25.341	25.06	6.94%	-5.68%
BOE	Nov-21	11.943	12.37	6.12%	-7.55%
CII	Nov-21	21.067	22.18	5.40%	0.14%
DLY	Dec-21	18.495	18.45	7.67%	-6.63%
ECAT	Nov-21	18.469	18.63	6.47%	-10.04%
EOS	Oct-21	22.955	24.50	6.74%	2.81%
HQH	Nov-21	24.647	24.18	8.48%	-0.70%
KF	Dec-21	33.840	34.05	5.92%	-13.69%
NPCT	Nov-21	17.975	18.31	6.77%	-6.82%
PDI	Nov-21	25.137	25.08	10.56%	2.74%
PDO	Dec-21	19.609	19.41	30.28%	-0.05%
QQQX	Dec-21	29.163	30.46	5.88%	2.39%
RMT	Dec-21	11.086	11.63	7.26%	-10.81%

Other CEFs

My portfolio includes 11 other CEFs not listed elsewhere in this article. The 2,600 shares across these funds represent 19.3% of my CEF portfolio. The group is net profitable over cost, at 7.9%, and has an average distribution yield of 6.92%.

Aberdeen Total Dynamic Dividend (AOD)
BlackRock Science & Technology Trust II (BSTZ)
Calamos L/S Equity & Dynamic Income Trust (CPZ)
JHanco*ck Preferred Income III (HPS)
JHanco*ck Tax-Advantaged Dividend Income (HTD)
BlackRock Corporate High Yield Fund (HYT)
KKR Income Opportunities Fund (KIO)
Royce Value Trust (RVT)
Tekla Healthcare Opportunities Fund (THQ)
Tortoise Power & Energy Infrastructure (TPZ)
Cohen & Steers Infrastructure (UTF)

CEF	Opened	Unit Cost	Last Price	Yield	Dis./Prem.
AOD	Feb-19	8.517	10.39	6.62%	-6.82%
BSTZ	Aug-21	36.649	38.50	6.07%	-1.38%
CPZ	Jul-20	18.355	19.48	8.49%	-5.39%
HPS	Sep-20	16.875	18.73	7.06%	3.54%
HTD	Oct-20	22.453	25.84	6.43%	0.86%
HYT	Oct-18	11.532	12.17	7.62%	1.50%
KIO	Nov-18	15.141	16.47	7.74%	-1.73%
RVT	May-19	17.987	19.39	8.66%	-4.34%
THQ	Oct-19	21.154	25.59	5.32%	1.31%
TPZ	Nov-19	15.485	13.27	5.45%	-13.10%
UTF	Jul-20	26.627	28.15	6.63%	0.04%

Most of these are funds that I will continue to buy on good price dips. Some, such as BSTZ and RVT, provide exposure to stocks that I would not consider in my trading strategy. Others, such as CPZ, employ strategies that I don't prefer to use myself. CPZ is a long/short fund, and I'm happy to trust the expertise of the fund managers to do that. I also like that CPZ has increased the distribution three times since I've opened the position, for a total distribution increase of 27.2% per share in one year. The chart below for that has an error: CPZ did not miss a distribution in January 2021.

(Source: CEFConnect.com)

Paying Me Now

My income from CEF distributions has increased steadily over the past 3 years. In 2021, CEFs generated >$12,200 in income for my portfolio, or about 52.9% of total income. The top 10 CEFs throughout the past 5 years (DSL, AWF, KIO, BIT, BGX, RQI, FAX, JPS, GDV and HYT) distributed nearly $22k or 64% of total distributions from CEFs. Half of these funds are currently not held in my portfolio as I've sold them and added others.

Using my TDAmeritrade "Income Estimator" tool, my portfolio of CEFs, REITs, and stocks should generate >$30k in dividends/distributions next year. And that doesn't include some holdings for which the estimates were unavailable. With swing trading of my stock positions, this estimate is likely to change every few months.

The same estimator tool was used to estimate income from only the CEFs. A few of the CEFs were excluded, but the estimate is for >$17.5k, with an average distribution yield of 6.82%. The total annual income will change as I add to positions and potentially receive special distributions, typically paid at the end of the year. Several CEFs provided these in 2021, including BDJ, BMEZ, BST, BSTZ, DSL, ETY (paid in November), GDV (pays in January), and PDO.

As I deploy more of my cash reserve, my income will exceed these estimates. With a steady flow of income, I can elect to re-invest the dividends, buy additional shares selectively as prices dip, or buy stocks for swing trading.

Final Thoughts

As my last update was at the end of September, this 4Q update is offered given the extent of changes that I have made to the CEF portion of my portfolio. With another rollover to this Roth account, I have been busy researching and investing in CEFs for the purpose of increasing income.

This is still a work in progress. There are many opinions about what will unfold for 2022, but there is a possibility that the markets will slow down some in 1Q 2022 given how far and fast they have run in 2021. That will favor income more than growth. I will continue to shop for lower prices across this basket of CEFs and add to positions to lower my unit costs and increase the number of shares that I can purchase.

I hope that readers have enjoyed my update and perhaps found something here of interest. As always, do your own due diligence.

Best to all for your investing/trading in 2022!

=Green=

Green Dot Investor

I am a retired self-directed investor/trader. In Green's Portfolio, I combine high-yield income investments with swing trading in a Roth IRA account. Until January 2017 I worked 44 years in land use planning and natural resource management in the mid-Atlantic US.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RQI, DSL, UTG, HQH 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.

I am also long all of the other CEFs indicated in the article as holdings in my portfolio.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.