Closed-end Fund Income Investing

When the discount turns positive I would still hold on if the dividends are consistent since my main goal is collect the income. The rise in share price helps lift the portfoio value as long as not too many losses in share price need to be offset ;). However, share price gains help increase the portfolio so I do sell CEFS with nice run-ups if the discount has jumped to a nice premium. I pocket the gains and with so many CEFs I can still find a good yield for the reinvestment.

I am not looking first to take profits in share price gain so I do not immediately dump when the price has jumped. I monitor by checking the entire portfolio net share gain or loss and monthly dividends v. total value of CEF portfolio. I am gonna use a new spreadsheet I am designing (nothing fancy as Excel is straightforward I just like to say design lol) to be able to download the positions quickly and do my monthly analysis. That is where I will cut any dogs if need be and replace with new funds and possibly add more (rebalancing if you will). Coming back on track so will be able to do this better going forward.

This is why I like using CEFs this way. I can monitor and research monthly and add or subtract positions and keep my focus on the futures and option trades while collecting nice dividend income.
 
Thanks for the input coach....

I find it difficult to stay in a CEF if the share price profit is greater than 6 months of dividends...

But I will try harder... :)

glad to have you back

Toucan
 
Well there is no need to try to hold on to a profitable CEF. Money is money so take the profit if you want and it is there. I just hold these longer term since they are my secondary investments and I do not want to have to sell and replace as often. I want to capture the income as much as I can.

But no one is going to complain or blame you for taking a nice share profit :D


Quote from toucan:

Thanks for the input coach....

I find it difficult to stay in a CEF if the share price profit is greater than 6 months of dividends...

But I will try harder... :)

glad to have you back

Toucan
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Those of us with FRN CEF's might want to start watching a little more closely.

I'm waiting for the FED to actually drop rates once before I clear out my position in these, but some people have been lightening up. Go long shorter term zeroes. Wait until hike. Switch back into Floaters. Rinse and repeat.
 
Just came across this thread...Thanks Phil. I also believe CEF are a great tool.

Some comments:

1. Why CEF's?: Because of efficiency (.i.e., no need for fund manager to maintain liquid assets for redemptions, etc. Can maximize entire pool of funds into investments.

Number 2, because of LEVERAGE. Fund managers can borrow at much lower rates than the retail public. As long as return on investments outpace cost of borrowing, plus plus.

2. For these two reasons above, GREATLY biased to Bond CEFs'. Equity and Preferred CEF run greater risks of price volatility. Fund manager has less options if cost of capital becomes greater than return on investments. If sector falls out of favor, losses are magnified. Much longer to recover. In Bond funds, transition to higher interest rate bonds is weathered more quickly. Pricing is only reflective of industry assessment of bond value. Bond still pays the stated coupon rate.

3. Believe PRIMARY reason to own Bond CEF is for INCOME, not capital appreciation. If CEF is trading at a discount, then added incentive. I think of CEF as Long term hold for enhanced INCOME GENERATION.
 
How's this strategy?

Currently, you can get GMAC bonds yielding 8.0 - 8.5% (5+ years). What's the risk?? DEFAULT!

So, GM is trading at 30.5 level. Hedge your bond purchase with the purchase of a GM PUT (monthly or LEAP). If GM defaults on its bond interest obligations, it can only mean total disaster for the equity price.

One doesn't need many 10 cent puts to recoup losses.
 
Quote from craigatelite:

How's this strategy?

Currently, you can get GMAC bonds yielding 8.0 - 8.5% (5+ years). What's the risk?? DEFAULT!

So, GM is trading at 30.5 level. Hedge your bond purchase with the purchase of a GM PUT (monthly or LEAP). If GM defaults on its bond interest obligations, it can only mean total disaster for the equity price.

One doesn't need many 10 cent puts to recoup losses.
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I suspect that if you run the numbers there is no free lunch. Here's just an example that I came up with:

Buy 1000 XGM ~$18 share (GM 7.25% Senior Notes, $25 par, 07/15/41 Maturity), at the current price its yielding around 10.0% (1.80 annual dividend), cost = $18000

Buy 30 Jan 2009 GM Puts with a strike of 5, bid/ask is .45/.60 but I will be generous and assume that you can buy them at .50
30 contracts x .50. Cost = $1500, gives max protection of $15k return if GM goes to zero (so you still have $3000 at risk)

Between now and Jan 2009 there will be 9 quarterly dividend payments so the total dividends paid will be 2.25 x 1800 = $4050

Subtract the cost of the puts ($1500) and you have $2550 net (this ignores the fact that you must pay for the puts up front and that the dividends are paid overtime; also ignores taxes on the dividends)

$2550/$18000 = 14.16% total return, annualized = 6.3%

In addition you a taking a chance on the value of XGM, if it is trading at less then what you paid ($18) then you could take a loss on that as well (of course it could be higher as well I guess).

If GM goes bankrupt the day after you put this on you will be out $18000+cost of puts $1500 and you will only get $15000 from the puts so you will be out $4500.

Seems like a lot of risk/work for 6.3% yield.

Please let me know if I made a calc error or if you think there is a better example. I selected XGM and 2009 puts because I thought it would be cheaper to buy the farthest out put available to minimize option transaction costs (vs buying closer puts more frequently)
 
Quote from GTS:

I suspect that if you run the numbers there is no free lunch. Here's just an example that I came up with:

Buy 1000 XGM ~$18 share (GM 7.25% Senior Notes, $25 par, 07/15/41 Maturity), at the current price its yielding around 10.0% (1.80 annual dividend), cost = $18000

Buy 30 Jan 2009 GM Puts with a strike of 5, bid/ask is .45/.60 but I will be generous and assume that you can buy them at .50
30 contracts x .50. Cost = $1500, gives max protection of $15k return if GM goes to zero (so you still have $3000 at risk)

Between now and Jan 2009 there will be 9 quarterly dividend payments so the total dividends paid will be 2.25 x 1800 = $4050

Subtract the cost of the puts ($1500) and you have $2550 net (this ignores the fact that you must pay for the puts up front and that the dividends are paid overtime; also ignores taxes on the dividends)

$2550/$18000 = 14.16% total return, annualized = 6.3%

In addition you a taking a chance on the value of XGM, if it is trading at less then what you paid ($18) then you could take a loss on that as well (of course it could be higher as well I guess).

If GM goes bankrupt the day after you put this on you will be out $18000+cost of puts $1500 and you will only get $15000 from the puts so you will be out $4500.

Seems like a lot of risk/work for 6.3% yield.

Please let me know if I made a calc error or if you think there is a better example. I selected XGM and 2009 puts because I thought it would be cheaper to buy the farthest out put available to minimize option transaction costs (vs buying closer puts more frequently)
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GTS:

Sure...no free lunch. just a way to address risk in fixed income investing and still get a decent reward.

Check the math though????

Cost of Bonds = $18,000
Cost of Insurance (Puts) = $1,500
Total Initial Outlay = $19,500
Annual Dividend = $1.80 ($1,800/yr)
Total Income = $4,050
$4,050 / $19,500 = 20.77% Total Return
Average Annual Return = 9.23%
 
Quote from craigatelite:

Check the math though????

Cost of Bonds = $18,000
Cost of Insurance (Puts) = $1,500
Total Initial Outlay = $19,500
Annual Dividend = $1.80 ($1,800/yr)
Total Income = $4,050
$4,050 / $19,500 = 20.77% Total Return
Average Annual Return = 9.23%
More...
Yea, I was thinking of expressing it that way but the problem is that you are not taking into account that at the end of the period in question the options expire worthless (assuming that GM doesnt go kaput). So that spent $1500 is lost. What you wrote above doesn't take that into account.

Your initial outlay is $19500 but at the end all you have is $18,000 in bonds and $4050 in dividends - you gotta account for the cost of the put insurance policy somewhere in there, thus I just subtracted from the dividends.

If you look at the net, $2550 profit, on the $19500 outlay (instead of $18000 as I did previously) the annual return is even less.
 
From Sep 1st blackrock distribution release:

"The distributions for BlackRock Global Energy and Resources Trust (BGR) and BlackRock Health Sciences Trust (BME) include the Trusts' normal quarterly dividend ($0.375 for BGR and $0.384375 for BME) and a special distribution ($0.685 for BGR and $0.385625 for BME) given the performance of the Trusts' investments and option writing strategy."

BGR still trading at quite a significant discount - 13.8%.

Goes Ex-Div 9/13/06 for a $1.06 Dividend, which will give a 6.75% yield for the year to date, with another expected $.375 dividend for December, making an expected 8.15% yield as of 9/1/06's closing price of $26.81.

Speculation: Last year's short term cap gains dividend came as of December for about 65 cents. Will there be another distribution this december as well besides the regular dividend?

Only up $0.21 today but on rising volume. Big oil reserves story impacting energies, obviously.

Dyodd.
 
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