Choose Closed-End Funds For Income

By Aryeh Katz | September 30, 2009 AAA

Closed-end investment funds are a corner of the securities world of which many investors are unaware. A closed-end fund is essentially the same as a mutual fund except no new money can enter the fund after the initial offering. Shares trade on a regulated exchange at prices more or less in line with the value of the securities held in the fund. Closed-end funds are as varied as the managers that operate them. Some specialize in income-producing securities, others in foreign stocks and bonds, while still others specialize in options-related strategies.

Below we highlight three closed-end funds with good distributions and recognized names behind them.

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High on Mortgage-Backed Securities
TCW Strategic Income Fund (NYSE:TSI) invests in a wide array of securities, including convertible bonds, preferred shares and high yield debt, among others. The stock is up roughly 250% from 52-week lows set in October of last year.

TSI currently yields 6.2% annually and trades at a 7.33% discount to its net asset value. The 30-year old fund is currently heavily laden with Collateral Mortgage Obligations (CMOs). Indeed, nine of its top ten holdings and more than 90% of the entire fund are devoted to these and other mortgage-backed securities.

PIMCO's Global StockPLUS & Income Fund (NYSE:PGP) has appreciated 150% in the last six months and currently yields a lush 13.70%. The fund is a mix of investment grade bonds and equity index derivatives. Interestingly, over half the portfolio (56%) is invested in just two financial instruments: a FNMA 6% note and S&P 500 index futures contracts.

Floating to Bigger Returns
The fund also apparently sees a rising interest rate environment looming, as a full five of its top ten holdings are floating rate notes (FRNs), securities that remove reinvestment risk from a fixed income portfolio by readjusting yields higher as rates rise.

The fund has paid steady, bimonthly distributions since its inception four years ago.

Boulder Growth and Income Fund (NYSE:BIF) is also concentrated in two core holdings that comprise 30% of the fund's holdings: Warren Buffet's Berkshire Hathaway (NYSE:BRK.A) and WalMart (NYSE:WMT). BIF now trades at a roughly 15% discount to net asset value.

The Wrap
Closed-end funds are another great source of income for investors seeking regular, outsized dividends. But be sure to choose your CEFs prudently and be sure they match your needs. They're as diverse an investment product as they come, and should be investigated thoroughly before any commitments are made. (To learn more, read Uncovering Closed-End Funds.)

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