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High yields with closed end funds -- too good to be true?


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Sorry if this topic might be too US centric.

 

Yes I well know that

 

-- you should never invest in something you don't understand 

 

(So I'm interested in learning about it)

 

-- seeking financial advice on internet forums is very questionable 

 

But please humor me anyway. I know there are some financial gurus here so maybe they have some wise feedback on this.

 

I came upon this item on getting a high yield with closed end funds.

 

So I'm wondering is this too good to be true? What are the real risks? Can this be done within a US IRA retirement account or as seems to be implied in the article only in a non retirement brokerage account?

 

As far as I can imagine the risks are initial capital investment decline and not getting the hoped for return. Are there other risks than that?

 

Gurus. What do you think of this idea?

 

https://www.forbes.com/sites/michaelfoster/2020/10/20/how-to-invest-100000-for-940-per-month-in-passive-income/#642033465cec

 

How To Invest $100,000 For $940 Per Month In Passive Income

 

 

If you have $100,000 to invest, you can easily use it to unleash a dividend stream that pays you $940 a month. That’s $11,280 a year in dividends—on just $100K!

I know you’re probably thinking this sounds too good to be true (and you should be!), especially when 10-year Treasuries dribble out just 0.7%, and the typical S&P 500 stock isn’t much better, with a 1.7% yield.

Edited by Jingthing
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I have been investing in closed-end funds for some time and use a website CEFCONNECT to analyse them before buying. It is free and allows one to dig down into each fund's details as well as filtered s

As a lifetime investor, no reward comes w/o risk... pretty much simple as that... 

crypto staking is a very safe and viable way of getting some fantastic returns on your money.   

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Whenever I hear about interesting investment vehicles such as “investment vehicle xyz”,  I google “Investment vehicle xyz scam”.

 

Then, a great deal of articles show up detailing all the particular risks.

 

Happy Googling.

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15 minutes ago, Jingthing said:

As far as I can imagine the risks are initial capital investment decline and not getting the hoped for return. Are there other risks than that?

Not exactly other risks & I think

a) value bias makes sense after growth stocks outperforming for so long, &

b) closed end funds are a relatively neglected space (eg often trading at a discount to their underlying assets)

but these things put me off:

1) The 'dividend' is partly funded by capital gains; if they get capital losses, it will drop sharply. So changes in capital and income will be (even more) highly correlated (than usual). 

2) The 25% leverage will magnify losses as well as gains (& margin is available quite cheaply from brokers like IB, so a managed fund doesn't gain much of an edge).

3) Like all managed funds, the manager may have a bad year (or 3) so although the fund is diversified across assets, it's probably wise to diversify across managers.

 

Buying (smart) value etfs on 25% margin & planning on selling a bit for 'income' might broadly equivalent, with lower fees. (Unless there's a juicy NAV discount)

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6 minutes ago, mr mr said:

crypto staking is a very safe and viable way of getting some fantastic returns on your money. 

 

Safe in some ways, but presumably pretty/very volatile?

 

OT but any recommendations for a "duffer's guide to crypto" (mainly focussing on how to use it)?

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Well obviously, the magic comes from 1) the leverage:  if you have a stable level of income ,above treasury yields , and stable capital value then you can borrow and magnify your income considerably. The problem is the capital values of the underlying assets may decline (which will concern lending institutions to the fund) and also the income from those assets could be pressured. This is pretty much the formula that real estate investors (eg Trump)  have been using since years , but applied to share markets. When it works it can create enormous value, but , as always, leverage can work both ways and you can loose money more quickly.
The other bit of magic that the good  quality closed end funds can make use of is 2) the ability to retain earnings, ie you can retain cash in good years and use that to smooth investors income in the bad years.

For what it’s worth, I think closed end funds are a great option for investors to consider. They have some advantages over both ETF,s and Mutual Funds.

I would be cautious of those that seem to offer overly aggressive returns but there are also a number of  high quality funds that are conservatively managed, that I think offer good potential.

i am aware of Gabeli and think (FWIW) , that it is a pretty high quality investment shop, with some talented people. I believe they follow a very disciplined “value” investment approach which has been out of favour in recent years, but, who knows, it may well be the right place to be for years to come. My gut feel is that they are likely to be in the right place, eventually!, but patience maybe needed. For absolute sure this is not some sort of scam operation or half assed bucket shop! 
i have not looked at the particular fund the OP references in any detail but I will take a look now.

in summary, for the Op, I think closed end funds are , in general,  well worth considering, and I think the article he  quoted lays the pros and cons out pretty well. 

Edited by wordchild
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The third bit of magic with these funds is that, because they are daily traded, they can sometimes trade at significant discounts to their underlying assets. Especially when out of favour.  Not something that would ever happen with a mutual fund. You can pick up some great value tracking some of these discounts eg you might be able to buy a fund with a portfolio you like at a 10 percent ,or even more  , discount to the value of the share holdings  in the fund.

i have not looked at the Gabelli fund as yet but sort of suspect that may have happened here.

Having said that, even allowing for some asset discount, the yield quoted in the article sounds out of line with the sort of yield I would expect from a leveraged portfolio of highish yielding US shares. 5/6 percent would be more realistic and maybe more sustainable in the long run. As mentioned above, I have a degree of respect for the funds management but I suspect that the income return (As quoted) may not be sustainable over time. That does not mean that the fund may not still be a good investment prospect.

 

Edited by wordchild
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Why not invest in particular stocks for example ......AT&T (T) is currently paying an annual dividend rate of 7.85% (Price $26.50) or Exxon Mobil (XOM) which is currently paying at an annual dividend rate of 10.60% (Price $31.57) or REIT's which have been hammered by COVID.

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19 hours ago, beachproperty said:

AT&T (T) is currently paying an annual dividend rate of 7.85% (Price $26.50)

If you followed that advice a couple of months ago at $30 a share - would the dividend cover the losses?

 

 

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2 hours ago, kenk24 said:

As a lifetime investor, no reward comes w/o risk... pretty much simple as that... 

In that there is normally the greater the return the greater the risk.....  then all the blood suckers hanging off it all...

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3 hours ago, kenk24 said:

If you followed that advice a couple of months ago at $30 a share - would the dividend cover the losses?

 

 

But I didn't give that advice a couple of months ago......

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