In an on-going search for funds with high yields, I find a fruitful crop of them at Eaton Vance's closed-end (CEF) group. For the time being I am ignoring their municipal bond CEF group and looking at the "alternative" investment funds.
In general the funds achieve high yields in one of two ways. The first uses leverage, wherein they borrow or issue preferred shares at a lower rate than they can earn. This works well for fixed income vehicles from straight bonds to bank loans and for high dividend-paying stocks.
The second way to get higher yields is to buy stocks and write call options against them, the "buy/write" approach. Savvy investors have done this for generations and now it is possible to do it with a single fund and at fairly low cost.
I own ETG which is in the first group. It holds a quality global stock dividend-paying portfolio and leverages it about 30% for higher yield. Also many of these CEF stocks tend to trade below net asset value (NAV) which further leverages the returns. I started buying this fund in October and November in small pieces at a time on big down days. Given the leverage and the fear, many of these stocks got crushed and were paying over 20% annualized. ETO is up 50% since late November (total return basis). I plan to take part of this holding off the table if and when a correction seems likely, but I will want to re-buy it later. At current prices, ETO is paying a monthly dividend equivalent to ~12.5% annualized.
In the buy/write stock group I am thinking of buying ETY which holds an unleveraged quality global portfolio. It sells calls on the SP500 and Nasdaq and sometimes Nikkei and FTSE up to about 80% of the long stock holdings. So they can get capital gains if the stocks they hold go up more than the indexes they've sold plus they are exposed net long 20%.
ETO and ETG did very well during the bull market to 2007. ETY didn't start up until the end of November 2006 so it had no meaningful bull market exposure. Since November 2008 all three have done quite well.
These funds are for the tax-deferred IRAs, and I plan to manage them in much the same way as I have managed the oil & gas trusts. If they go up, say, 25% above my purchase price I will sell enough to bring them back down to the total purchase level. If they fall 25% I will buy some more up to the original level. It's very easy to do this with limit buys and sells and just "let it happen". I started this approach after reading Steve Selengut's book "The Brainwashing of the American Investor" last summer.
About 70% of the IRAs is in Vanguard, Hussman, and Loomis Sayles bond funds and the rest in the oil and gas trusts and some of these Eaton Vance CEFs. I'm generating over 8% yields from day one with a good bit of inflation protection.
I still may either totally cash out the IRAs and pay the taxes at 2009 rates or partially cash them out as I have written before. I'll await events between now and November or December to decide. But in the meantime I'm being paid more than 8% to wait.
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