If you like high-income investments, this report reviews our top 10 high-income closed-end funds (“CEFs”) with annual yields ranging from over 5.0% to over 9.0% (many of them paid monthly). The opportunities range from bond funds to style-specific equities, and we consider the distribution yields, premiums/discounts (versus NAV), investment strategies (versus current market opportunities), fees, risks and more. We currently use a handful of CEFs within our prudently concentrated Income Equity portfolio (along with other attractive income opportunities, such as dividend-growth stocks, REITs, BDCs and more), and if you are an income-focused investor—the CEF names on this list are very attractive and worth considering. Without further ado, here are the details on our top 10 high-income CEFs.
Top 10 High-Income CEFs (alphabetical order by ticker)
Adams Diversified Equity Fund (ADX), Yield: 6.8%+
It’s hard for many investors to believe, but the Adams Diversified Equity Fund has been paying big distributions to investors for over 80 years. And it does so by investing in equity opportunities that not a lot of investors would think of as “income-producing” opportunities. Specifically, ADX is heavy into technology stocks and light on utilities and real estate, as you can see in the following chart.
And considering these sectors don’t traditionally pay dividends anywhere near the 6.8% + yield that this fund offers, you may be wondering where the income comes from. ADX generates the income through a combination of dividends and capital gains. This strategy is attractive not only because it delivers the steady income a lot of investors want, but they do it by investing in a lot of important market sectors that a lot of income-investors miss out on (for example tech).
And what is really great about this fund is that it currently trades at a large discount to NAV, so you are basically getting access to all the dividends and price appreciation potential of the underlying holdings at a very attractively discounted price! Also important, ADX has a relatively very low management fee, and it uses essentially no leverage (or borrowed money).
Lastly, before you ask, this fund pays 3 smaller distributions in Q1 - Q3, and then a big annual distribution in Q4 (still coming up later this year), so a lot of internet sites incorrectly report the yield as lower than it really is. The fund guarantees at least a 6% yield each year, and as the growth and tech sectors have been picking up in recent weeks, this year’s big Q4 distribution will likely be quite healthy. If you are a long-term buy-and-hold investor that likes big distribution payments, this one is absolutely worth considering, especially at the discounted price!
Our last full report on ADX was late last year, but you can read more about ADX on its website here or on CEF Connect here (lots of good data on CEF Connect).
BlackRock Multi-Sector Income (BIT), Yield: 8.0%
When it comes to high income bond CEFs, PIMCO rules the roost, but it might behoove a lot of investors to also consider BlackRock bond CEFs (such as BIT) considering it has a lower expense ratio, a more attractive price relative to NAV (no monster premiums, like PIMCO), and if offers largely similar diversified bond market expose. And when it comes to sophistication and access to plenty of resources, BlackRock’s organization in on par with anyone, including PIMCO. Plus, BIT uses a prudent and conservative amount of leverage (relative to PIMCO), recently at just over 30%—which we like.
Our last full report on BIT was late last year, but you can access lots of more current data on BIT on CEF Connect here.
BlackRock Credit Allocation Income (BTZ), Yield: 6.6%
Another attractive BlackRock bond CEF, only this one actually trades at a discount relative to its NAV, which basically means you are getting exposure to the income stream of the underlying holdings at a discounted price. Like BIT, BTZ has rebounded dramatically since the depths of the coronavirus sell off in 2020 (we were advocating this as an extremely strong buy back then, read here), and it has subsequently rebounded hard, but remains very attractive. The lesson learned from that 2020 sell off is that despite the dramatic temporary price decline, the big monthly income payments never stopped.
Our last full report on BTZ was late last year, but you can read more about BTZ on CEF Connect here.
DoubleLine Yield Opportunities (DLY), Yield: 7.1%
This relatively newer bond CEF is managed by famous bond investor Jeffrey Gundlach, and it does have some attractive uniqueness worth considering. First of all, it trades at a bigger discount to NAV than almost all other bond CEFs in this report (a good thing), yet it still offers an attractive yield and holdings. Interestingly, it has a bit higher exposure to somewhat riskier emerging market and high yield bonds than other bond CEFs on this list, however the holdings generally have shorter maturities (less risk) and less interest rate risk (lower duration). We also like the prudent leverage and the strengthening economy as the US leads the world out of the pandemic in many ways.
Our last full report on DLY was late last year, but you can read more about DLY on its website here, and on CEF Connect here (lots of good data on CEF Connect).
Wells Fargo Income Opportunities (EAD), Yield: 7.9%
If you are a stickler on discounts versus NAV, this one has the lowest price (i.e. the biggest discount) relative to NAV of any bond fund in this report, yet it still manages to pay a big yield (monthly), and it’s managed with a prudent amount of leverage (recently 25.8%). This fund is different than others due to its larger allocation to high-yield (below investment grade) opportunities. Per the fund factsheet:
Under normal market conditions, the fund invests at least 80% of its total assets in below investment-grade (high yield) debt securities, loans and preferred stocks. These securities are rated Ba or lower by Moody's or BB or lower by S&P, or are unrated securities of comparable quality as determined by the sub adviser.
If you like big monthly yield at a discounted price, this fund is worth considering. You might consider buying a little now, and then buying more the next time market volatility ticks up because the price on these high-yielders will likely temporarily go down thereby creating an even more attractive buying opportunity.
PIMCO Dynamic Credit/Mort Income (PCI), Yield: 9.4%
PIMCO has earned a reputation as the top bond fund manager in the world, and the company really puts the pedal to the metal with its high yield, high amount of leverage (over 40%) and high management fees. Yet investors continue to love it as its big steady monthly distribution payments have continued to roll in (despite the shares trading at a big premium relative to its NAV).
However, unbeknownst to many investors, this one may be merged with two other PIMCO bond CEFs later this year, resulting in a slight distribution reduction. We wrote about this potential “red flag” merger in great detail earlier this week, and you can access that report here. Despite, the potential bumps in the road ahead, this is the only PIMCO bond fund we continue to own.
Adams Natural Resources Fund (PEO), Yield: 6.0%
Switching back to an equity fund, another Adams fund (actually, the only other Adams fund) made the list. The Adams Natural Resources Fund invests in energy and materials stocks, and it is attractive for a variety of reasons. Like the other Adams fund, PEO has also been paying distributions for over 80 years. And it also trades an attractive discount to NAV (which means as an investor, you are getting access to the underlying holdings at a discounted price). Further, with economies continuing to open back up and inflation on the rise (higher energy and materials prices) this fund is looking increasingly compelling. For reference, here is a peek at the funds recent top holdings:
Just keep in mind, like the other Adams Fund, this one also pays three smaller dividends in Q1 through Q3, followed by a bigger on in Q4 (still coming up later this year).
You can read more about PEO on its website and on CEF Connect.
Royce Micro-Cap (RMT), Value (RVT), Yield: 5.2%, 5.5%
We’re adding the Royce Micro-Cap Trust (RMT) and the Royce Value Trust (RVT) to the list together because they’re both managed by Chuck Royce’s company (famous small cap investor) and because they both offer compelling yields, attractively discounted prices and exposure to small cap stocks which were hit harder during the pandemic sell off, but may continue to strengthen as economies continue to reopen. For starters, here is a look at the recent performance of small (iShares) and micro-cap (iShares) stocks versus the rest of the market (S&P 500) and versus these two CEFs (RMT and RVT).
Small cap stocks in general (as measured by the iShares ETF) have been rebounding hard, but still lag the S&P 500, while the two Royce CEFs have outperformed. We attribute the Royce outperformance to the strong mangement team, but believe these allocations in general have more upside room to run as the economy continues to reopen. For your reference, you can access our recent reports (from April) on these two Royce CEFs here.
Cohen & Steers Income Realty (RQI), Yield: 6.2%
If you are looking for a compelling, out-of-the-box way to play the continuing strength in the real estate sector, RQI is worth considering. It offers a healthy 6.2% yield (paid monthly), it trades at a discounted price (versus its NAV), and it has a growing track record of success. We did a deeper dive into RQI a few months ago, in which we reviewed the fund strategy, holdings, leverage, expense ratio, pricing/valuation, and why we believe the opportunity is particularly compelling if you are a long-term income-focused investor. You can access that report here.
Reaves Utility Income (UTG), Yield: 6.3%
If you are an income-focused investor, boring can be very attractive. And this utility-sector closed-end fund (UTG) has many boring and many attractive qualities. And considering our ongoing low interest rate environment (combined with the increasing trajectory of inflation), this monthly high-income producer is worth considering (especially after the decline in utility stocks over the last couple weeks due to the changing inflation expectation hit). We recently completed a detailed report on the attractive qualities of this fund, and you can access that report here.
The Bottom Line on CEFs:
CEF’s can be very attractive, especially if you are an income-focused investor. Some investors balk at them because they would prefer to buy individual securities on their own. However, when you factor in the discounted prices, the attractive use of leverage, the strong management teams, and the fact that many of them can invest in things you can’t do on your own (such as attractive bond opportunities), CEFs can be very compelling. We currently use a handful of high-income CEFs within our prudently-diversified, long-term, Income Equity portfolio, and you can view them, along with all of our current portfolio holdings, here.