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Old 04-05-2024, 01:35 PM
spinner1001 spinner1001 is offline
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Quote:
Originally Posted by crash View Post
If it doesn’t adjust to NAV you still have been paid a good return from the dividend. Most of these funds pay 6% or more. These funds are more about income then capital gains.
The bigger dividend yield of say 6% mainly happens because of a CEF’s typical discounted share price.

For instance, suppose a traditional income-oriented mutual fund pays dividends of $5 (per fund share) and the fund’s shares trade for $100. A buyer of one fund share earns a 5% dividend yield.

$5 / $100 = 5%

Now, suppose an otherwise identical CEF holds the same underlying investments and the CEF shares trade at a 20% discounted price compared to the traditional fund’s shares — it trades for $80 rather than $100. The CEF investor still gets $5 per share in dividends on their $80 investment — about a 6% dividend yield.

$5 / $80 ~ 6%

A CEF produces a higher dividend yield that an otherwise identical open-end mutual fund because its shares trade at a discount. It’s math.

But if investors are rational, why would CEF sellers accept a $80 share price when an otherwise identical open-end fund trades at $100? Perhaps buyers require a illiquidity discount on the CEF shares. Or the sellers at $80 are not actually rational.