|
|
 |
 |
|
|
|
|
|
A Closed-End Surprise: Possible Dividend Cuts |
By IAN SALISBURY
WSJ.COM, March 17, 2008
Investors hoping credit problems will translate into higher yields on closed-end bond funds could be in for a surprise: dividend reductions.
While the shaky credit market means fund managers have been able to snap up bargains in the bond markets, analysts say, this benefit could be trumped by higher borrowing costs. These costs have been eating into interest payments the funds pass along to shareholders in the form of dividends.
"It's going to start to impact incremental income," says Cecilia Gondor, an analyst at Thomas J. Herzfeld Advisors Inc. "We think we're going to see dividend cuts."
The issue cropped up several weeks ago, when the auction-rate markets where closed-end funds typically borrow began to falter. Initially, several analysts said dividend cuts weren't likely. But, as short-term interest rates have crept up, the prognosis is changing.
The problem is acute for municipal closed-end funds, which hold about $89 billion of the $315 billion invested in all closed-end funds. Municipal funds have fewer attractive borrowing options than other types of funds. By contrast, the minority of bond funds that don't borrow money to boost returns aren't likely to be affected.
Closed-end funds differ from traditional, open-end funds because they issue shares that trade on a stock exchange, instead of issuing and redeeming shares at net asset value. Most bond closed-end funds, however, don't just invest money raised from common shareholders. The funds also borrow additional money by issuing preferred shares.
This process, known as leveraging, has gotten more expensive during the past few weeks, eating into returns and even raising the possibility that closed-end funds may have to sell their extra holdings and cease to borrow money.
Many funds are paying short-term interest rates of 4% or more, analysts say. In addition, the actual hurdle may be 0.5 percentage point to one percentage point higher because of fees paid to firms that oversee preferred-share auctions and because fund companies' own fees effectively increase borrowing costs.
The average yield on top-rated 30-year municipal bonds is about 4.9%. Although many funds earn slightly more by investing in riskier bonds, they still don't have a lot of room for error.
At least one fund already has trimmed its dividend, citing higher borrowing costs. Last month, New America High Income Fund lowered its monthly payout to investors by 26%. A spokeswoman for the fund didn't return calls for comment.
Other firms, including Nuveen Investments Inc., Eaton Vance Corp. and Aberdeen Asset Management Inc., have said they plan to redeem some pricier forms of debt and seek cheaper ways to borrow.
|
|
|
|
|
|
| Partner Market Place |
|
Sign In and Search LIVE Offerings with easy-to-use maps - Go To BondSearch123.com
Choose Your Own CD Yields:How would you like to choose the yields you want on FDIC-insured CDs – instead of the yields someone else has chosen? - More
|
|
| Stuff to look at |
Yield and Income Newsletter: A must have for income investors. subscribe NOW
2007 Investment advice:
The stealth move that could topple world equities. [ more] |
|
| BondsOnline Advisor |
March Issue:Income Security Recomendations:Read More [+]
Past Issues: Read More [+] Keep up with monthly, in-depth coverage of fixed income market strategies, commentary, and insights as seen by our sources. Sign up for the free BondsOnline Advisor now! Unsubscribe here [+] |
|
|
|
|
Bond Search Research Bonds 
