5 Favorite Closed-End Funds for Retirees and Income Seekers

Closed-end funds that pay out a reliable stream of income can help in the planning for retirement, explains Rida Morwa. Here, the editor of High Dividend Opportunities and contributor to MoneyShow.com highlights his favorite ideas for retirees and other income investors. BNY Mellon Municipal Bond Infrastructure Fund BNY Mellon Municipal Bond Infrastructure is a CEF that invests in municipal bonds. With prices beaten down by inflation and rate hike fears, now is the time to buy municipal bonds. While both inflation and interest rate hikes represent real headwinds for municipal bonds, the market has done what it can always be counted on doing. It has overreacted to an extent that has made municipal bond funds a good value. As income investors, now is the time to pick up a safe stream of income at a good price. Municipal bonds are very defensive investments. Governments have a somewhat captive audience in the residents of their jurisdiction so they have a much easier time increasing taxes than a regular business would in raising prices. This is true even during a recession, and why investors rush into municipal bonds when economic times get hard. This produces both good cash flow and price increases during recessions. Exactly what we want as income investors looking to get a jump on the hard times that might be coming. DMB had paid out a monthly dividend of 5.3 cents per share since 2016. That produces a current yield of 5%. While municipal bonds tend to have lower yields than similarly rated corporate bonds, municipals are Federal Tax Exempt. Typically, the distribution from DMB is 100% federal tax-free. Depending on an investor's highest marginal rate this will correspond to a much higher rate on a fully taxable bond. If one's highest marginal rate is 22%, DMB's rate after taxes will be equivalent to a fully taxable bond paying 6.19%. Even at the 15% rate, DMB is still as good as 5.68% from a taxable bond. Bridges, roads, utilities, and other infrastructure make up over 32% of the DMB's assets. Funding such infrastructure is a basic function of government with a long history of successfully repaying bonds in full. Healthcare, over 20% of the portfolio holdings, is another area where municipal governments have a good history of repaying debt. Right now, the fear of the impact of higher interest rates and inflation is having an outsized impact on the price of municipal bonds and funds like DMB that invest in them. This makes for a very good opportunity to pick up a fairly safe investment with a high yield. Whichever direction the Fed decides to go, I view the future of municipal bonds over the next years as very positive. Cohen & Steers Quality Income Realty Fund Cohen & Steers Quality Income Realty has approximately 200 holdings with 13% exposure to housing (apartments, single-family homes, and manufactured housing). REITs that concentrate on infrastructure make up another 12% of their holdings. RQI has an 8% exposure to corporate bonds and 8% exposure to preferred shares to add some additional ballast to the portfolio. Malls and shopping centers combine for less than 5% of the portfolio. Leverage is currently at a modest 25% level. RQI invests in real estate and its top holdings are all equity REITs. REITs make money by owning real estate that they then rent out to tenants. This is a fairly stable income stream because people and businesses tend to pay their rent even in the hardest of times. RQI has not cut the distribution over the last 10 years. Instead, it has had several distribution increases, with the most recent increase in 2015. In October of 2016, RQI switched from a quarterly distribution of 24 cents to a monthly distribution of 8 cents, keeping the same annual total distribution. Despite a general market decline, RQI's NAV is still above where it was before the Covid pandemic hit. NAV has generally been increasing over the years, so the small amounts of ROC in the distribution have not been destructive. This year, the distributions have been covered 40/60 by a mix of short- and long-term capital gains. Typically, NII makes up a bigger portion of the distribution in the second half of the year. RQI navigated the last recession with only a short-lived reduction in the distribution, so the current distribution looks reasonably safe. With a yield of 6.6% and the share price being down almost 20% so far this year, now looks to be an excellent entry point as RQI is trading at a discount. Disregard the warnings of economic calamity and take advantage of the insane income opportunities all over the market. Flaherty & Crumrine Dynamic Preferred and Income Fund Flaherty & Crumrine Dynamic Preferred and Income has one of the best CEF managers in the field. The fund has a heavy emphasis on the preferred securities of financial companies. These industries represent almost 82% of the fund's holdings. With the increase in interest rates over the last year, the net asset value of DFP is down. This is to be expected and isn't automatically a bad thing. New assets with higher yields can be purchased as rates go up. 90% of current assets are fix-to-float which will also eventually benefit from increasing interest rates. While investors have been trained to automatically think that rising prices are better than falling prices, being a net buyer means that lower prices can be an opportunity. That is the case today with funds that hold preferred shares. DFP is positioned to benefit from rising rates but is now priced at a bargain. DFP fully covered its distribution last year with interest and dividend income from its holdings. It did not need to use any capital gains (long or short) to cover the distribution, nor did it have to use ROC (Return of Capital). So far this year, that has continued to be the case. While it has had to trim the distribution some, that means that it is well positioned when its assets fix-to-float coupons increase due to higher interest rates. Right now, the fear of the impact of higher interest rates is having an outsized impact on the price of preferreds and funds like DFP that invest in them. This makes for a very good opportunity to pick up a relatively safe investment with a high yield. Even with the announcement on July 21, projecting the most recent distribution for a year gives a forward yield of 7.15%, about the five-year average. With about 45% of its portfolio in investment grade securities (and another 40%+ in companies with investment grade), the 90% fixed-to-float nature of the holdings makes this a good buy for solid safe income in uncertain times. PIMCO Corporate & Income Opportunity Fund PIMCO Corporate & Income Opportunity is a CEF that focuses on fixed income investments and is managed by PIMCO, one of the top managers of fixed income investments. Its portfolio is composed of a mixture of various debt investments with small amounts of preferred shares and common stock. Its debt investments include corporate bonds (nearly half the portfolio), senior floating rate loans, non-Agency MBS, and other asset-backed securities. As is to be expected when interest rates are increasing, the NAV (and share price too) of PTY has been decreasing. Investors often have difficulty grasping that rising bond prices often work poorly for bond investors while falling bond prices often work better. Back in January, PTY generated NII (Net Investment Income) for the month that exceeded the distribution it paid in January by just 3 cents per share. In June (the latest month reported, the NII exceeded the distribution paid out by 7 cents. This increase in income was such that the distribution coverage for the previous six months went from 114% to 138%. So, despite being in a period that many think is bad for bonds, PTY increased the safety of its distribution. This improved distribution coverage is good for several reasons. First, improved coverage makes the current distribution that much safer and given the uncertainty in the market, economy, and the world in general, more safety is always better. Meanwhile, CEFs have a requirement to pay out most of their NII to shareholders. So with the YTD coverage ratio now at 130.5%, the chance that PTY will increase the distribution or pay out a special distribution has increased. Finally, while we like PTY primarily as an income investment, over its existence it has proven to be a pretty good investment for total returns as well. Since its inception in December of 2002, PTY has had total returns with a CARG of 11.03%, that compares to SPY which has only had a CAGR of 9.93%. This is a very good long-term total return results for a fund that was recently yielding 11.4%. Reaves Utility Income Fund Reaves Utility Income Fund is a superstar CEF that has stood the test of time since its inception in 2004. The utility sector experiences inelastic demand and generates predictably consistent earnings through difficult economic conditions. This is because the individual demand for utilities (electricity, water, waste collection, gas, internet, wireless telecom services, etc.) stays relatively stable even during poor economic times. Plus as the population increases so too increases the aggregate demand for utilities. More demand equals more revenue. Adding to the defensive nature of the utility sector, and UTG's holdings in particular, is that most of the assets are regulated utilities. This means that the companies UTG invests in have a captive customer base. Due to zero competition, they are assured of getting a price that will allow them a profit. When they borrow to build new assets, they are also nearly guaranteed a profit. This makes for safer investments and more predictable dividend results. All a utility company has to do to be predictably profitable is to execute growth plans without unreasonable cost overruns, and not annoy their respective utility commissions. UTG has demonstrated an impressive ~61% increase in NAV, with no distribution cuts since its inception on February 24, 2004. This distribution record has allowed UTG to produce a highly reliable income for shareholders. The CEF has also paid the occasional special dividend over the years. UTG trades a modest 2.5% premium to NAV, presenting an attractive entry point into this quality CEF. UTG is modestly leveraged at ~18% and comes at a 1.2% expense ratio. This leverage positions the fund for continued asset price declines while allowing the fund to increase leverage once prices begin to recover. The CEF maintains a portfolio of 41 securities that are some of the most defensive names in the market. UTG pays $0.19/month for a current 7.3% annual yield. Since its inception, UTG has nearly doubled its distributions, going from 9.67 cents a month to 19 cents a month. For investors looking to grow their income in addition to having a high yield, UTG fits the bill. Subscribe to High Dividend Opportunities here... https://seekingalpha.com/checkout?service_id=mp_1006

5 Favorite Closed-End Funds for Retirees and Income Seekers

These CEFs invested in diversified areas offer reliable streams of income and attractive yields.

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