More Perils of Yield Hogs

Closed-end funds are one place investors are looking to earn higher income. They’re also paying up for this yield and taking on much higher levels of risk, risks they might not realize. Bloomberg recently surveyed the market and found investors are paying hefty premiums for yield. Six of the 10 closed-end funds with the highest premiums are from PIMCO, and one carries a hefty 66% premium. That means an investor who pays shares of the PIMCO High Income fund is paying $1.66 for each dollar of assets owned by the fund.

Closed-end funds, which sell a fixed amount of shares to raise money for investments and then trade on an exchange like stocks, on average pay out 6.7 percent, beating dividend yields offered by open-end mutual funds, stocks in the Standard & Poor’s 500 Index and bonds, in part because they can use debt to boost returns for investors. While a premium signals confidence in the manager, buying the funds for more than its underlying holdings are worth can increase the risk of losses if the share price declines.