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By Scott Burns | 05-07-2010 05:30 PM

Two High-Yield Ideas in Closed-End Funds

These higher-risk satellite holdings could give your overall portfolio a boost, says Morningstar's Mike Taggart.

Scott Burns: A couple of high-yield ideas from the closed-end fund space.

Hi there. I'm Scott Burns, director of ETF and closed-end fund research with Morningstar. Joining me today is Mike Taggart, our closed-end fund strategist. Mike, thanks for joining me.

Mike Taggart: Yeah, good to be here.

Burns: First of all, when we talk about yield with closed-end funds, there's a common mistake that so many investors make. Maybe you can talk a little bit about what the composition of that yield is, and what they should look for?

Taggart: Sure, Scott. When you look at the distribution that you're receiving from a closed-end fund, it's really important to look at the source of that distribution. There are three areas where that income can come from. It can come from the net investment income. That would be the bond's interest payments that had been made to the portfolio or stock dividends. Then you have realized capital gains.

Then the third one creates all the mistakes. It's return of capital, where they are actually returning your invested capital to you.

Burns: So it's not really a true yield. It's just your money back.

Taggart: Exactly. If there's a return of capital component to it, it's not a true yield. Investors really don't understand this fully, I don't believe. A lot of times you'll see investors flocking towards the funds with the highest headline yield, when it's not really a yield at all.

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