If you like big income, CEFs are worth considering. In this report, we share data on over 100 big-yield CEFs (sorted by category), and then rank our five favorites (starting with number five and counting down to our top ideas).
100 Big-Yield CEFs
For your reference, the following table includes over 100 big-distribution CEFs, including important metrics like leverage, discounts/premiums and more. The list is organized by CEF strategies and then market caps. You likely recognize at least a few of your favorites on the list.
data as of Friday 9-Dec-22, source: CEF Connect
Our Top 5 Favorite CEFs
With that data backdrop in mind, lets get into additional details and countdown our top five favorites from the list.
5b. Reaves Utility Income Fund (UTG), Yield: 7.6%
If you like big monthly income and lower-share-price-volatility, you might want to consider the Reaves Utility Income Fund. For starters, it invests mostly in the Utilities Sector (common stock, preferred stock and debt), and the Utilities sector is knows for its lower volatility than other sectors of markets. Utilities stocks also generally pay higher dividends than other sectors, so this helps UTG keep its yield high with less leverage (or borrowed money) than some other funds.
Also important to note, UTG is concentrated. Unlike other CEFs that can hold hundreds (or even over 1,000) of individual securities, UTG currently holds ~44 securities. This allows the fund to pursue strong performance by putting more weight into top ideas.
Further, UTG focuses on tax-advantaged income (qualified dividends, which can reduce your tax bill if you hold UTG in a taxable account).
Also, UTG’s monthly distributions (which have steadily grown over time) generally consist of investment income and long-term gains (not short-term gains or return of capital). It’s good to avoid short-term gains (because they can be taxed at a higher rate) and to avoid ROC (return of capital) because it can reduce the cost basis on your investment so you get hit with a bigger capital gains tax when you do sell your shares.
If you are looking for big, steadily-growing, monthly income sourced from a steady sector of the market and currently trading at only a very small premium to NAV, UTG is attractive and worth considering.
5a. Adams Diversified Equity Fund (ADX), Yield: 7.1%
Incredibly, ADX has been paying dividends to investors for over 80 years straight, and it is on track to continue doing so in a very healthy way. For starters, it currently trades at a large discount to NAV (slightly larger than usual) as investors have been averse to stocks (it is actively diversified across US equity sectors), thereby creating a potentially lucrative contrarian opportunity. Also, ADX doesn’t use leverage (making it less risky) and it has a lower total expense ratio than most CEFs (currently ~0.54%). Importantly, ADX pays three smaller distributions in quarters one through three ($0.05 each this year), and then a larger year-end distribution in the fourth quarter ($0.92 this year). This cadence causes all kinds of challenge for data sources, and they often misreport ADX’s distribution (both over and under the actual). In aggregate, ADX will deliver $1.07 in total distributions for 2022, thereby offering an annualized yield of 7.1% (based on its current $14.95 per share). You can read our previous full report on ADX here.
4. DoubleLine Yield Opportunities (DLY), Yield: 10.3%
With a big juicy yield (paid monthly) and trading at an attractive discount to NAV (-10.7%), DLY is hard to ignore. DLY is a relatively new fund (launched in 2020), it invests in bonds (many of them high-yield) with the objective of high total returns and with an emphasis on current income. Credit spreads are somewhat elevated currently, thereby driving the price of this fund lower and creating potential price gains as markets recover. The fund is managed by famous bond investor, Jeffrey Gundlach. It also has relatively low interest rate risk (duration was recently only 2.46), which can be a good thing in a rising interest rate environment. Further still, the income has been driven from the income on the underlying securities (not necessarily capital gains or ROC), which we consider attractive. If you are looking for big steady income with the potential for healthy price appreciation, DLY is worth considering.
3. BlackRock Multi-Sector Income (BIT), Yield: 10.1%
BIT is special and attractive for a variety of reasons. Aside from its big monthly distribution payments and its discounted price versus NAV, it also has virtually not interest rate risk (duration is close to zero) which can be a very good thing in a rising interest rate environment. We have owned BIT in the past, and it is currently high on our watchlist for potential investment soon. We recently wrote this one up in detail, and you can view that report here.
2. PIMCO Access Income Fund (PAXS), Yield: 10.8%
PAXs is a new PIMCO bond CEF (launched in 2022), and it is currently one of the only PIMCO funds that is NOT trading at a large premium to NAV. We suspect the price will rise rapidly relative to NAV as more investors become familiar and buy into this relatively new fund. PAXs seeks current income as a primary objective and capital appreciation as a secondary objective, and it utilizes an opportunistic approach to pursue high conviction income-generating ideas across global credit markets. Both the duration (4.29) and the total expense ratio (1.79%) are reasonable for this professionally managed (PIMCO is first class) reasonably levered (36.8%) bond fund. You can read more about this fund here and here.
1b. Royce Value Trust (RVT), Yield: 8.0%
1a. Royce Micro-Cap Trust (RMT), Yield: 12.2%
Royce is a first-class fund manager, known for its expertise in small cap investing. Both of these funds have long track records of outperforming the market, they both trade at attractive discounts to NAV, they use prudently conservative amounts of leverage (4.1% and 4.5%, respectively) and have very reasonable management fees. What’s more, small cap stocks are particularly attractive now based on their current valuations relative to historical levels. We wrote these funds up in detail back in August, and they both remain highly attractive today (you can access the report here).
The Bottom Line:
CEFs are an attractive option for income-focused investors, and they can be a prudent part of a diversified investment portfolio (especially now from a contrarian standpoint with share prices and valuation down this year). We currently own both RMT and RVT (we added them to our Income Equity Portfolio recently), and we also believe the other names on this list are highly compelling. Remember to keep your own personal goals as the top priority when you are selecting investments, and remember also that prudently-diversified, goal-focused, long-term investing has been a winning strategy throughout history, and it will be this time too!