You’ll likely buy a closed-end fund or CEF for its dividends and distributions.
And the one thing that’s certain about those dividends and distributions is that they are likely to change over time, says John Cole Scott, the chief investment officer of Closed-End Fund Advisors.
In fact, 97% of CEFs recently changed their dividend policy. And it cuts both ways. About 40 CEF’s have raised their dividend, while 40 have lowered their dividend. “In the best-case scenario, the board gets together with the manager of the fund and they look at the market, they look at the distribution rate and ask if it’s sustainable,” he says.
And what might happen in the wake of such meetings is impossible to predict with any certainty. “Some funds are more proactive and make smaller cuts,” he says. “And some funds seem to take you over the cliff until you fall.”
What’s important to understand when investing in CEFs though is this: “Cuts are part of the process of mixing an investment changing environment with interest rates,” says Scott. “And we can’t control interest rates.”
“The only way for a bond manager to not change the distribution policy is to be in charge of interest rates.
It’s important to know that it can happen. Sometimes it’s so big and unknown it destroys the near-term pricing, but it’s also a great time to jump in if you’ve been waiting to buy that fund.”