This Is The Biggest Fear CEF Investors Have In This Market

Many CEF investors are worried about a dividend cut. And of course, they should be taken into account. but cef are No same as stock. As we invest in high-quality CEFs, there are a few other things we should remember when we catch wind of a cut:

1. High-quality CEFs sometimes reduce the payout by a small amount so they can reinvest capital into oversold bargains. I’ll have more to say on this in a moment, but the result is that this has the potential for us to gain more from this move than we lose in dividends.
2. As mentioned, these deductions are generally Small, reducing the yield only a small amount (again, we’ll demonstrate this below).

Before we go any further, we should actually pause for a moment and talk about the importance of diversification. In the portfolios of many CEFs, you can be sure that if you choose funds that are profitable, have a large discount to net asset value (NAV, or the investment in their portfolio) and have solid fundamentals that make them profitable, your There will not be much change in income. over the long term.

For example, take two very different funds: the Nuveen Real Asset Income & Growth Fund (JRI), i have a catch CEF Insider The service primarily holds shares of real estate investment trusts (REITs), utilities and pipelines as well as bonds issued by these firms; and corporate bond-oriented PIMCO High Income Fund (PHK), Both funds have cut dividends in the past.

What we’re seeing here is a history of very small payout reductions over time, including a recent penny-per-share reduction initiated by JRI earlier this year. PHK’s cut is large, but appears to be behind it as the dividend has been stable since the start of 2020.

Now consider this.

Although PHK’s dividend has held steady for three years, it has made investors less money. To be sure, JRI’s recent penny-per-share cut narrows the distribution by a hair, pushing the current yield from 9.6% to 8.7%. But that is still a very high income stream.

And if you’re not happy with JRI’s dividend cut since early 2020, you can still sell, then redirect profits to another CEF with a higher yield.

In addition, JRI’s penny-per-share cut sets it up for more profit because it lets the fund redistribute its capital into REITs, which are now notably oversold. JRI is still a strong performer due to its eye on value. Its appeal also includes the fact that despite this, it trades at a massive 13.3% discount to NAV – while the underperforming PHK gets a discount of 11%. Premium!

To delve a little deeper into the CEF dividend cut, let’s go back to JRI’s payout reduction in October 2017, when the dividend was cut by half a penny per share. This deduction was one of the reasons why I recommended JRI CEF Insider Member. Speaking of Nuveen, I wrote in the October 2017 issue that: “The firm will cut dividends if it feels it’s in the best interest of the fund as a whole — and in JRI’s case, it has.” This was true in October 2017 and it is still true in 2023.

this is also true for many closed-end funds, All 10 of the 10 top-performing CEFs of all time have cut dividends at some point in their history, and seven have cut dividends in the past decade.

However, these funds have Too They outperformed their benchmark index funds over the same period, while their 8.6% average yield yielded nearly five times the return of the S&P 500. In short, these funds provide you with a high income stream that remains high, even after the market outperforms, with small cuts here and there.

See how one of those superstar CEFs, the Columbia Seligman Premium Technology Growth Fund (STK), Has outperformed the S&P 500 for a decade.

It just goes to show that with CEFs, when you focus on long-term total return rather than a penny dividend cut here or there, and when you invest in top-quality stocks with high income streams and market-beating potential. Diversify your collection of funds, you can create true wealth.

Michael Foster is Lead Research Analyst opposite point of view, For more income ideas, click here for our latest report”Perpetual Income: 5 bargain funds with steady 10.2% dividend yield.,

Disclosure: none