Closed-end Fund Income Investing

Please share... commercial REITS are a much safer bet, I agree. But I do think that investors, in general, will dump REITS once weakness in the housing market is clear to all. OTOH, that should give us some very nice discounts in the REIT CEF's for a while, but it may be a long haul and rocky road. I'll leg into that S-L-O-W-L-Y.

I'm long a REIT mutual fund and I am just waiting for year-end dividend and income distributions to get the heck out Hope it doesn't tank b4 that, but in this window dressing market right now, I doubt it. Where is eqt trader when you need his cheerleading?!?

BTW there are some interesting observations on CEF's on the morningstar forums under closed end funds.
 
Keep up the good work Optioncoach. I appreciate your good research. I have invested in CEF before, but never did the proper research, so I was not succesful.

I do have one question. You mentioned putting a stop loss for the percent of the dividend. Say its 7%. What if the shares drop 7% in 4 months. Arent you losing quite a bit since you havent recieved 8 months of dividends? I beilieve that was one of the examples you used. Thanks.
 
Good question. If the fund drops 7% in 4 months and it was yielding 7% per year then you should have already banked about 2.33% in dividends for 4 months since we are focusing on monthly paying CEFs. Therefore the net loss should you close is really 4.66%. I speak about the dividend yiled as a good stop loss but you can certainly decide to hold on to the CEF if the dividend is still consistent and good. The reason is that if you have a good diversified pool of CEFs, the share gains and losses should offset each other significantly, protecting your income stream.

The stop loss method I mention above is the easiest one to follow for many who do not wish to stay on top of their portoflio or have the time. Another choice I call the "Check and Cit" method and you simply leave the portfolio alone unless the net share return of the portfolio turns negative and then simply chop off the fund with the worst share price drop %. So if a fund is down 7% with a 7% yeild, you can still decide to keep it if your entire portfolio is up 1%. Your portfolio is still yielding the average divdiend yield plus 1% of share gain. If the portfolio ever moved to a negative net share return, then chop off the worst fund and replace it with a new researched CEF.

This method allows you to protect your nice yield and maintain a positive share return as well. Your turnover will be less since you can decide the time frame which to "check and cut". YOu may have to give the portfolio some time when you first establish it but after some time, you can even check at the end of each week and simply make the adjustment the following Monday. The key is to keep your funds and sectors well diversified. This method will force you to drop the deadweight and replace it while protecting your income stream. It will also selectively move out the sectors that start to underperform over time. Of course you need to keep track of which funds you cut and look for patterns as to why they are dropping to avoid replacing a fund in a losing sector with another in a similar sector. So some due diligence is still required.

Phil


Quote from johnmarg:

Keep up the good work Optioncoach. I appreciate your good research. I have invested in CEF before, but never did the proper research, so I was not succesful.

I do have one question. You mentioned putting a stop loss for the percent of the dividend. Say its 7%. What if the shares drop 7% in 4 months. Arent you losing quite a bit since you havent recieved 8 months of dividends? I beilieve that was one of the examples you used. Thanks.
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I have not forgotten everyone.... I have been doing some research on commercial REIT CEFs and found a few but nothing screaming. I may just list the 2 or 3 I have narrowed it down to and let the discussions decide which might be the best bet.

Phil
 
Did some more research and came up with the following interesting REIT CEF candidate:

RQI- Cohen & Steers Quality Income Realty Fund

Share Price: $20.00 (12/02)
NAV: $23.12
Discount: -13.49%
Yield: 8.40%


RQI invests in REIT stocks and REIT preferreds and I like it as as large-cap REIT, Office sector addition with a great yield supplied by that discount. The discount has widended from its low of about 6% in early January but I feel that this widening is a result of two factors, (1) pullback in the huge run-up of REIT stocks and (2) rising rates hurting the profit margin due to use of leverage. However, the NAV has increased slightly over the last quarter and I feel the above two factors will not be as big a weight on the NAV and share price.

First, I have read from analysts that continued expansion of the U.S. economy and improving occupancy rates will keep REITS growing and thus keep the NAV growth positive. Also, many believe the FED is near the end of its monetary tightening cycle, all things remaining constant so further squeezes in profit margins from leverage should be minimalized. Moreover, the fund, at 33% leverage, has entered into fixed rate swaps for half that leveraged amount to lock in as much of their interest costs as possible to protect as much of the dividend stream as they can. Based on the above, I think it is not a bad time to grab a REIT CEF, especially one at such a nice discount and with that nice yield.

Another reason I like RQI is diversification. Geographically, the fund has 21% in the South Atlantic, 21% in the Pacific, 18% in the Mid-Atlantic and 11% in the North East Central (Chicago), so the REIT holdings are spread out over the major metropolitan centers in the U.S. Also, no one holding makes up more than 5% although the top 10 holdings do make up 33% of the fund. THis is because most of the holdings are in large-cap REIT stocks such as Vornado, EOP, CarrAmerica, etc. But still, the sectors still range from OFFICE (25%) to Hotel (1%) so you have a pretty good diversified real estate investment with no one sector in any part of the country being able to drag down the fund.

The discount is at the high for the year but the NAV has upticked the past 6 months or so and if conditions continue to improve I would hope the share price would follow. However, my main enticement is that 8.4% yield and diversification of CEFs within a portfolio can help hedge away most of that share price risk will still collecting nice monthly income.

Downside naturally exists on increasing rates related to leverage and unexpected weakness in office space sector.

So for REITs with a slight bias towards office properties, I like RQI.
 
How about this:

JPC - Nuveen Preferred and Convertible Income Fund

Share Price: $12.11 (12/05)
NAV: $14.29
Discount: -15.26%
Yield: 8.42%

Personally, I lack the confidence you have in U.S. real estate continuing on it's merry way; for this reason I would look at alternatives to REITs.

With the possibility of the Fed reaching the end of a tightening cycle (as you mentioned), fixed income is looking better and better. The discount, and an all time high of -15.26% can perhaps be attributed to this years rate hikes - consequently one can reasonably anticipate the discount to ease as rates stabilize.

The yield here is just as high as the REIT fund, and here we have even more diversification. The leverage is about the same, as is the ratio of preferred:common holdings.

What say you? A good fund for those looking for equity preferred exposure?
 
one of the cefs i follow and own had a nice day today EVV. goes ex dec 8.

Closing NAV: $18.18
Closing Share Price: $16.40
Premium/(Discount): -9.79%
Current Market Yield: 9.23%
 
With respect to real estate, remember we are not talking about the U.S. housing market. Commercial real estate runs on a different track, it is not the value of the property so much as it is the value of the leases and occupancy rates. That is why I am leaning towards REITS with commercial properties diversifed across the U.S. as a focus.

As for JPC, I believe I owned them at one time and perhaps cut them when they dropped in price but I will look into them again. I agree that if the market is positive in 2006, this fund will do well and that discount will narrow. Getting it now at that discount could be quite a bargain. Most CEFs were hurt with rising rates due to their leverage and as that settles in the negative effects will be reduced as the fund's assets grow somewhat. I think this is a good fund and will dive into the reports to look under the hood.


Quote from ig0r:

How about this:

JPC - Nuveen Preferred and Convertible Income Fund

Share Price: $12.11 (12/05)
NAV: $14.29
Discount: -15.26%
Yield: 8.42%

Personally, I lack the confidence you have in U.S. real estate continuing on it's merry way; for this reason I would look at alternatives to REITs.

With the possibility of the Fed reaching the end of a tightening cycle (as you mentioned), fixed income is looking better and better. The discount, and an all time high of -15.26% can perhaps be attributed to this years rate hikes - consequently one can reasonably anticipate the discount to ease as rates stabilize.

The yield here is just as high as the REIT fund, and here we have even more diversification. The leverage is about the same, as is the ratio of preferred:common holdings.

What say you? A good fund for those looking for equity preferred exposure?
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I am going to look them up but for the folks playing along at home, can you give me the general sector or type of fund it is? Thanks for the tip though, that yield and discount look attractive if the fund's assets check out.

Quote from vhehn:

one of the cefs i follow and own had a nice day today EVV. goes ex dec 8.

Closing NAV: $18.18
Closing Share Price: $16.40
Premium/(Discount): -9.79%
Current Market Yield: 9.23%
More...
 
Quote from optioncoach:

I am going to look them up but for the folks playing along at home, can you give me the general sector or type of fund it is? Thanks for the tip though, that yield and discount look attractive if the fund's assets check out.
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ITS A BOND FUND.

The Fund pursues its objectives by investing its assets primarily in three distinct investment categories: mortgage-backed securities that are issued, backed or otherwise guaranteed by the U.S. Government or its agencies or instrumentalities or that are issued by private issuers, senior, secured floating rate loans, and corporate bonds that are of below investment grade quality.
 
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