Bond rates are plunging, banks pay next to nothing, and stocks are so rich that the S&P 500 Index yields a paltry 1.4%.
My mailbox is thus brimming with queries about offbeat, high-distribution investments. Many are leveraged funds, rely on options and futures trading, or extend high-rate loans to less-creditworthy borrowers. Some augment regular income payments with periodic returns of capital.
That is tolerable when a fund manufactures enough trading profits or capital gains to cover these emoluments. But returned capital does not count as "yield" and is not a dividend. (It does postpone a possible capital gains tax bill.)
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Which of this high-test stuff is safe and timely?
Generally, I am all-in on striving for extra yield, evidenced by the strong multiyear returns in high-yield corporate and municipal bonds, preferred stocks, most leveraged closed-end bond and income funds, and pipeline and infrastructure partnerships. These are all straightforward and understandable.
But the income marketplace is also full of gadgets and thingamajigs, so when Richard writes in to extol Credit Suisse X-Links Silver Shares Covered Call ETN (SLVO), or Steve asserts that Guggenheim Strategic Opportunities Fund (GOF) "seems too good to be true," or Thomas wonders how I have overlooked Cornerstone Strategic Value Fund (CLM) when it "pays a monthly dividend" at an annual rate of 16.2%, I need to evaluate each idea individually. Most of the time, I find flaws, such as high fees or madcap trading. But sometimes oddities have their day – or days – of glory.
Triple Play
Of late, this reader-chosen trifecta is successful, even stunningly so.
SLVO, which is linked to a silver index and sells covered call options on that index for income, has a one-year return of 24.6%. Because silver is rampaging, the value of the call options SLVO sells is way up, and so it has issued monthly distributions of 11 cents to 20 cents so far in 2021. That's a pace above 20% annualized, based on the July 9 closing price of $6. But I would never count on anything linked to gold or silver for essential income.
Guggenheim Strategic, a leveraged junk-bond fund, has a one-year return of 43.0% and pays $2.19 annually on a $22 share price. About 60% of that is returned capital, but there is enough actual income to yield 3.9%. Cornerstone Strategic, which owns stocks ranging from Amazon.com (AMZN) and Apple (AAPL) to small-company shares, as well as some closed-end funds, has a 33.9% one-year total return, mostly capital gains. The income layer of its fixed monthly distribution is only 1.6%. Thomas, the rest of your cash inflows are returned capital or trading gains.
Guggenheim and Cornerstone, like so many closed-ends, owe much of their good fortune to the ascension of their share price to a high premium over the value of their underlying assets. Neither fund has a great long-term performance record, but kudos to readers who sussed out these or similar opportunities a year ago, when premiums were small or shares traded at a discount. There is a reasonable argument that it is wiser to pick up a mediocre CEF at a cheap price than a good fund that trades at a premium.
Not every unusual income fund is a winner. Another reader named Richard bragged on IVOL, the Quadratic Interest Rate Volatility and Inflation Hedge ETF. Rates are volatile and inflation hedges are in vogue, so this fund sounds exactly right. But its fortunes depend on the use of derivatives to profit from market stress. That is hard to sustain. After a strong debut in 2020, IVOL has a total return of 1.1% for 2021 through July 9 and has lost 3% in the past two months. It might be too much of a contraption to work over time.
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