Closed End Funds That Offer A Discount To Reinvest

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it. – Albert Einstein

After building my Income Compounder portfolio over the past several years, I am now reaping the rewards of my investments, just in time to support my retirement. I retired from my full-time career as an information systems manager back in August 2023. I received a pension upon retirement and rolled over my 401k savings into high yield funds like CEFs, BDCs, REITs, and a few ETFs. Most of those securities offer a monthly distribution and several of the CEFs that I own offer a discount to reinvest based on the company’s DRIP policy.

While it may not seem like a big deal the opportunity to grow your future income even faster by reinvesting shares into high yield funds at a discount not only benefits your income stream due to the discounts available, but it also helps preserve your invested capital by reducing your cost basis.

Consider for a moment the math behind a 5% discount to market price. If you own 1,000 shares of a fund that trades for $10 per share and you reinvest your 12% dividend, you will receive $100 (first month) which will give you 10 new shares at market price. But if those new shares are reinvested at 95% of the market price you will receive the new shares at a price of $9.50 each, giving you 10.526 new shares ($100 divided by $9.50). Then you will own 1,010.526 new shares the following month and will receive a distribution that is 10% of that new amount (1/12^th of 12%), or $101.53 to reinvest, and so on each following month.

Not all brokers support the discounted DRIP for these funds, but I learned that Fidelity does support the discounted reinvestment option for many of the funds that I own, and which offer a discount. In my recent article discussing the Cornerstone funds CRF and CLM, I explained how reinvesting those shares at NAV offers a substantial discount while the CEFs trade at a premium. Furthermore, other CEFs that pay a high monthly distribution that I have discussed in previous articles, also offer a discount to DRIP. The funds in my Fidelity IC portfolio (shown below) that offer a discount include:

• CCIF: you can read what I wrote about that fund here
• CLM and CRF: see link above
• ECC: from the fund Annual Report:

If 95% of the Market Price is greater than the Company’s last determined NAV per share, the number of shares to be credited to each participant’s account pursuant to DRIP will be determined by dividing the aggregate dollar amount of the distribution by 95% of the Market Price. If 95% of the Market Price is less than the Company’s last determined NAV per share, the number of shares to be credited to each participant’s account pursuant to DRIP will be determined by dividing the aggregate dollar amount of the distribution by the lesser of (i) the last determined NAV per share and (ii) the Market Price.

• EIC: most recently reviewed in my November 2023 article
• OCCI: switched to monthly distribution and started a discount to DRIP in November
• OXLC: from the fund’s Annual Report, page 60:

We expect to use primarily newly-issued shares to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. Under such circumstances, the number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the distribution payable to such stockholder by an amount equal to ninety-five (95%) percent of the market price per share of our common stock at the close of regular trading on the Nasdaq Global Select Market on the valuation date fixed by our Board of Directors for such distribution.

• PDI: All Pimco CEFs support the DRIP program which is outlined here
• OPP: both OPP and RIV offer the same DRIP discount as noted in the January press release:

Shareholders may consider the dividend reinvestment plan as a convenient way to add to their Fund holdings along with other potential benefits. For example, if a Fund is trading at a discount to NAV, the investor generally receives shares acquired on the secondary market at/near that discount to NAV. In the case where a Fund is trading at a premium to NAV, the investor will typically receive newly issued shares by the Fund at NAV.

• RIV: in February I reviewed RIV and you can about it here
• XFLT: I discussed the discount to DRIP in this article from last August

The paragraph below is taken from the XFLT Annual Report from the fund’s website and is a typical discount that is offered by those CEFs that normally trade at a premium to NAV, in this case 95% of market price or at NAV (whichever is greater) if the premium is more than 5%.

Under the Plan, whenever the market price of the Common Shares is equal to or exceeds NAV at the time Common Shares are valued for purposes of determining the number of Common Shares equivalent to the cash dividend or capital gains distribution, participants in the Plan are issued new Common Shares from the Trust, valued at the greater of (i) the NAV as most recently determined or (ii) 95% of the then-current market price of the Common Shares.

Each fund has its own DRIP policy which you will need to read to confirm that it still supports a discount when you select the reinvestment option. Typically, the information is included in the fund’s Annual Report and/or Semi-Annual Report.

Some of the newer DRIP discounts including the ones offered by OCCI, EIC, and CCIF required some phone calls and emails to both Fidelity and the fund sponsors to get the discount to DRIP enabled by Fidelity. Earlier this year there were many comments going around the SA website discussing all the efforts by investors to persuade Fidelity to support the new DRIP policy for those 3 funds. Now all 3 of those policies are in place and supported by Fidelity when you select the dividend reinvestment option for each security, and you have your fellow investors on SA to thank for that.

Screenshot below is from my April 1, 2024, Fidelity IRA Account Activity page.

Dividends received that show “Pending Reinvestment” all offer a discount to DRIP.

You may notice that not all the funds I own in my IC portfolio are set to reinvest the distribution. For example, I take the distributions from SCD and GHY as cash so that I can then either take a cash distribution from my IRA to cover my living expenses without selling shares, or I reinvest that cash in other funds that happen to be on sale. This screenshot from April1 also shows a cash dividend from PAXS. That is because I sold my PAXS shares after the ex-div date for a nice profit and collected one last dividend. I am still holding PDI but that is currently the only Pimco fund in my portfolio.

Guggenheim Strategic Opportunities Fund (GOF)

Another fund that I did not own prior to April 1 (but do now) and that also offers a discount to DRIP includes GOF. From the fund website:

The DRIP price is the cost per share for all participants in the reinvestment plan. The DRIP price is determined by one of two scenarios. One, if the Common Shares are trading at a discount, the DRIP price is the weighted average cost to purchase the Common Shares from the NYSE or elsewhere. Lastly, if the Common Shares are trading at a premium, the DRIP price is then determined either the higher of the NAV or approximately 95% of the Common Share price.

GOF offers a 15% yield based on a monthly distribution of $.10821 that it has paid every month since 2013. Although many have warned of a dividend cut coming soon, GOF just declared another monthly distribution in line with the previous for April. I decided to add back some shares of GOF to my IC portfolio and turn the DRIP on.

The graphic display of distributions from GOF on CEFconnect nicely conveys the point of the steady distribution, which was not reduced even during the 2009 GFC or the 2020 Covid pandemic when many other funds cut theirs. Of course, I said that about RA last year who kept their distribution steady for 7 years before drastically reducing theirs, so there are no guarantees.

Conclusion

As an income-oriented investor who wishes to live off my investment income to support my lifestyle in retirement, I am always seeking additional methods to compound my income each month. By purchasing more shares at a discount on the open market, then reinvesting additional new shares of those CEFs at an even further discount when that is offered, I am further compounding my current income and growing my future income stream even more.

Meanwhile, if I need to withdraw some cash to support my lifestyle I can either sell some of those reinvested shares at a premium to market price and pocket the difference, or I can simply take distributions as cash from other income investments that do not offer a discounted DRIP and withdraw that income without the need to sell any shares. I also maintain a buffer of cash in high yield savings accounts and in cash-like securities such as SGOV, JBBB, and IBHF in my investment account for that inevitable emergency or unexpected medical bill that often happens when you least expect it!