Closed-end funds a worthy contender for the savvy investor

Dear Mr. Berko:

I have been putting off buying municipal bonds because I thought interest rates would be higher. I did buy, for $20,000 face value, three junk municipals you recommended almost a year ago. I got 9 percent on two Illinois bonds and an 8.5 percent California bond.

Now that it seems that rates will remain low for the foreseeable future, I want to invest $20,000 in some closed-end municipal bond funds but only if I can get 6 percent yields or better. I still have another $20,000 to put into municipals, but I'm going to keep it liquid just in case rates rise.

Do you think Congress will limit the amount of tax-free income we can get? What do you think of BlackRock and Nuveen, which have some high-yielding tax-free bonds?

Thank you in advance for your help.

CP: Waukegan, Ill.

Dear CP:

Darn, I like tax-free income. It's almost as rewarding as being a member of Congress or the state legislatures of Florida, Illinois, New York, Ohio, etc. And yes, there is talk of future limitations on tax-free income, and that includes a graduated tax on municipal bond interest.

More than a year ago, I wrote of a few Illinois and California municipals because I believed that their bonds were undervalued, that their yields were juicy-high and that prices would rise. Well, by golly, I wasn't wrong, and I still get an occasional email (got one last week) from readers who bought those 8 percent- to 10 percent-yielding bonds, and they're looking for more.

While there's still 10 percent-plus paper to be had out there, I'm not comfortable with any of it. There are, however, some 7 percents trading as closed-end funds (CEFs), and they look appealing. And they may look even more appealing if this Congress or the next Congress raises our taxes, pushing the value of those bonds higher.

The following all trade on the Big Board. You should buy these CEFs from Schwab or Fidelity or an equally well-known discounter that'll charge you between $7 and $9 a trade. This makes much more sense than paying 10 times as much through Dean Witter, Janny Montgomery Scott, Merrill Lynch or UBS.

First, BlackRock: It has 30 different national closed-end bond funds and probably hundreds more for specific states like California, New York, New Jersey, Pennsylvania, Michigan, etc. BlackRock would like to have exclusivity to underwrite closed-end municipal bond funds for Siberia, Croatia, Zimbabwe and Madagascar.

But the BlackRock CEF that I would recommend is their Municipal Income Trust II (BLE-$14.44), trading at a 0.17 percent discount to net asset value. The monthly 0.084 yields 7 percent, and it came public in 2003 at $15, with an initial 0.084-cent monthly dividend. BLE's trading range in the past 12 months has ranged from $11.87 to $14.89.

Nuveen is another well-known name that probably issued 700 or 800 individual offerings in the past few dozen years. It doesn't take a degree from MIT to figure out that every new IPO generates quarterly fee dollars for Nuveen's pockets. And while Nuveen may have more issues than Australia has kangaroos, the Nuveen folks have done a yeoman's job of keeping these municipal assets in line.

So among the smorgasbord of Nuveen funds, the Municipal Market Opportunity Fund (NMO-$13.25), trading at a 3.02 percent discount to net asset value, may be a good choice. NMO's 0.078-cent monthly dividend yields 7.1 percent. NMO was a 1990 IPO at $7.75 a share, and its 52-week trading range is $11.62 to $14.69.

Invesco Global has been around the city block a few times with scores of offerings. Its Van Campen Select Sector Municipal Trust (VKL-$12.07) was an $8-a-share IPO in 1995, and this year's trading range is between $9.89 and $12.16. The current market price puts VKL at a 2.9 percent discount to net asset value, and the 0.073 monthly dividend yields a nice 7.3 percent.

There are other CEFs yielding over 8 percent, but they give me the willies, and higher-yielding individual issues with yields over 12 percent are radioactive and give me the wonkas.

----------

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Fri, Dec 9, 2011

Comments

  1. No comments
Sign in to post a comment »