With the economy beginning to stall, Ben Bernanke's war on the nation's savers rolls on.
From his promise to keep the Fed funds rate near zero through late 2014 to his efforts to push ten-year note yields even lower, the Fed Chairman is a saver's worst nightmare.
You see, in Ben's world, the safety of money in the bank earning a reasonable interest rate is a dangerous thing.
It's why folks with savings have been virtually forced into the market these days in search of higher yields.
One place where income investors can find them is in closed-end funds.
A few of these funds even pay juicy double-digit yields -- like the one my Permanent Wealth Investor subscribers have earned 20% on in two years.
But here's the best part. You can actually buy closed-end funds like these on sale.
Let me explain.
Developed in the 19th century, closed-end funds are the oldest type of mutual fund. If you understand the idea behind a mutual fund, then understanding a closed-end fund is easy.
In essence, they are the same thing- pools of money controlled by a professional money manager.
However, in contrast, a typical mutual fund is also what's known as an open-ended fund.
This means that the fund itself can issue as many shares as it needs to meet the demand on any given day. So the total number of shares in this type of fund isn't fixed at all-hence the term open ended. Shares are added as needed.
As a result, the cost of any share in one of these funds is always bought or sold at its current Net Asset Value (NAV). That's why shares of open-end funds don't trade per se on the exchanges.
A closed-end fund, on the other hand, is totally different. Unlike an open-ended fund, closed-end funds issue a limited number of shares. That means the number of shares outstanding is fixed.
So closed-end funds actually trade on an exchange like a stock, and are bought or sold minute-by-minute with a price driven by market sentiment.
That means that just like a stock, shares may trade at a premium or discount to their net asset value. That's a key difference, and why I say closed-end funds can be bought on sale.
In fact, the typical closed-end fund trades at anywhere from a 2% to 10% discount to its net asset value.
However, just like mutual funds, closed-end funds invest in a portfolio of shares or bonds according to the fund's stated objectives. They can also use leverage and invest in private equity. While they generally pay out dividends as received on the underlying investments, they are not obliged to do so.
Closed-end fund managers also use a number of strategies to prevent their funds from trading too far below net asset value (which leaves them vulnerable to a takeover). Paying out dividends is one way to achieve this, which is why closed-end funds often achieve a high dividend payout or yield.
These come in several different types, some of which have hidden risks attached, so I'd like to provide you with a guide through this investing jungle.
Primarily, the ones with high dividend yields are of four types. They include:
So keep in mind there's more than one way to beat Ben Bernanke at this game. The right closed-end fund can give you both a decent yield and decent growth prospects.
Good Investing,
Martin Hutchinson, Editor
Permanent Wealth Investor
Further Reading...
In an earlier article Martin explained how emerging market dividend stocks give investors the best of both worlds. He even showed readers two ways to create emerging market income stream.