Income Closed End Funds & Total Return Analysis

What are the two main reasons mere mortals invest in income purpose securities: one is their inherent safety compared to equities... a 50% income asset allocation is much safer and theoretically less volatile than a 100% equity exposure.  

There is less risk of total loss in XYZ company bonds or preferred stock than there is in XYZ common stock... a major fact of investment life roundly ignored by most investors/speculators in overpriced stock markets.  

Equally important (as retirement looms larger) is the income these securities produce, first for compounding and then for spending.

Unlike Tom Wolfe's "Masters of the Universe", most of us are not bond traders. If our income inventory shrinks in market value, we don't have to sell our positions. Wall Street fixed income pros don't care about income production... buying and selling inventory is their business model, and they must trade at market prices. 

The "higher interest rates are coming panic" you are hearing about in the media is a real problem for Wolf's MOTUs, but it may be an investment opportunity for the rest of us. If I buy an Exxon 4% debenture, a 3% 30 year municipal bond, or a 10 year treasury note, three things are inherently true:

If interest rates rise, their market values will go down and it will be difficult to add to my positions... BUT my income (and their safety vis-a-vis equities) will not change; MARKET VALUE CHANGE HAS NO IMPACT ON INCOME. (typically, in high quality securities)

It is this "Interest Rate Expectation (IRE) Sensitivity" that CEF Investors are uniquely well positioned to take advantage of. All income focus securities (and funds that contain them) are impacted by IRE:

 "Market Value Varies Inversely With Interest Rate Expectations" 

The Net Asset Value (NAV) of CEFs is the sum of the values of hundreds of securities. They are inside a "protective dome", where only the manager can trade them. BUT we can "trade" the dome itself, reducing our cost basis and increasing our yield as we choose... something totally unimaginable in any other income investment medium.

So this is precisely what is going on "inside" income CEFs right now. Individual security prices are being forced down by the expectation of rising interest rates and a significant discount is available. Absolutely nothing has changed with respect to the quality of the securities or the income being produced "Under The Dome". The price of the dome has been reduced, and its "IN-YOUR-POCKET" income is rising.

No change in the securities, their quality, or contractual payments... only the price of the package has changed. So there they are investors, waiting for you to pad your retirement portfolios with income over 6.5% tax free and up to 8.0% taxable. 

These sweet discounts are only available through the financial genius of CEFs. Only here can "mere mortals" turn Wall Street's higher interest rates phobia into an income portfolio worth bragging about. There has been no news that suggests there is anything wrong with the securities under the vast majority of high quality CEF domes.

So don't be concerned with the "OMG, bond prices are falling" headlines... that's Wall Street's problem. This is the biggest CEF sale since 2011.

What are YOU waiting for, the Call to the Mall has sounded!