Investing in CEFs: Magnified Yields
Description
This article is from the A Guide to Closed-End Funds (CEFs).
Investing in CEFs: Magnified Yields
CEFs, when purchased at a discount, offer the benefit of higher yields. The reason is again simple: dividends are garnered on the NAV, but the investor puts in money at the lower market price if the fund is trading at a discount to the NAV.
For example, consider a CEF with an NAV of $10 trading at a discount of 20% or $8. Suppose the dividend yield of the CEF is 10% or $1. But, since the investor has put in only $8 to buy the CEF, his effective yield is much higher 12.5% ($1/$8).
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