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List of CEFs That Cover Their Distributions

December 30, 2011 – Comments (1) | RELATED TICKERS: AWF , NCZ , PHT

Investors in closed-end funds (CEFs) are constantly faced with uncertainty due to a lack of transparency within the industry. CEFs do not make it easy for the investor to make the most informed investment decision in determining the real value being delivered by the CEFs. This has led to a number of investing decisions based solely on distribution yield, premium or discount to NAV and other metrics that may not lead to the best investment decision. In general, investments in CEFs are used as a source of income for the investor. Therefore, it would seem logical for the investor to determine if the CEF can sustain the amount of income it is distributing to the investor as income.

Many CEFs use a distribution policy based on their estimate of future investment income. Any shortfall in investment income may be solved by the CEF by using return of capital to make up the difference between their estimate and actual investment income. Basically, the CEF is using return of capital disguised as investment income to the investor. This strategy is not in the income investor’s best interest as the CEF is taking advantage of the investor by decreasing the actual value of their investment. Some CEFs actually use this tactic as a promotional tool by increasing their distribution yield by returning capital to hook investors seeking a high yield investment. To support the individual investor against such tactics, I have compiled a list of popular CEFs to determine if they are earning the investment income to support their current distribution strategy.

See if your CEF can sustain its distribution?