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UPDATE: Closed-End Fund Dividend Cuts and Increases Since September 1

by on December 12, 2012

Dividend Cut Summary Chart

As a follow-up to our article last week on municipal bond dividend increases and decreases we want to put the large number of recent municipal dividend cuts into perspective.

Of the 103 National Municipal Bond Funds 39  or 38% have reduced their distribution yield since September 1st, 23 of these have occurred since December 3rd. This compares to the 40 dividend cuts across the other 497 funds in all other categories (380 if your remove the state specific municipal funds). This equals either 8% or 10.5% of the total number of funds for comparison.

As you can see in the table below, the average municipal bond fund cut has been -6%. To put this in real dollar terms, the average yield for a national municipal bond funds is 5.4% (as of Dec 7, 2012). If an investor had $500,000 invested in the average municipal bond fund you could expect a  future average monthly dividend amount of about $2,250 per month. The -6% cut would have reduced this each month by $135 or about $1620 per year.

Dividend Cut Summary Table

In our experience and from the ICI investor statistics  many owners of closed-end funds are retired and lived of the dividend income they receive from their closed-end funds. Financial planning experts believe people need to plan to have their income last until they reach 90-100 years old, and inflation has historically averaged about 3% a year even small changes to a portfolio forward looking yield can dramatically impact future living standard.

This is why we recommend investors monitor both pricing levels for their funds as well as dividend sustainability.  When asked if investors should still invest in municipal bond through closed end funds, we try to remind them that the income level is higher in most closed-end funds than in open-end, ETF and most individual bond ownership positions.

Conclusion: CEF investors continue to benefit from current cheep leverage, the fixed capitalization of the portfolio (no inflow or out flow risk). However, in order to receive this benefit and reduce some of the risk they need to watch their fund’s financial updates (often monthly for muni bond funds) and monitor discount or premium levels vs. other peer funds and historical levels.

John Cole Scott, CFS
Executive VP, Portfolio Manager
Closed-End Fund Advisors, Inc.
(800) 356-3508

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