Your thoughts, please.
---K.R., by e-mail from Dallas
A. I think you're looking at this from the wrong end. Who cares why the fund companies market the funds? What matters is whether your investments are in line with your personal beliefs because it is your money. Wouldn't it be hypocritical for a pacifist to invest in companies that derived all their revenue from the sale of land mines and weapons? If you think smoking is bad, should you go out of your way to collect dividends from Phillip Morris? Do you really want your future financial security to be built on a chain of rent-to-own shops or gimmicky high interest second mortgage lenders who exploit uneducated borrowers?
I have been told that a number of people still believe we are responsible for how we live our lives. That responsibility, in their view, includes how we let our capital be put to use.
Those afflicted with all-or-none thinking will tell us this makes investing impossible. I disagree. It's a big world. Those with strong ethical or religious beliefs have plenty of opportunities to avoid investment in companies that aren't in accord with those beliefs.
You might also consider a second argument. Socially responsible companies may be better investments because they may not be facing the line-up of future costs that less responsible companies face. For example, paper companies with advanced production equipment may be better investments than paper companies that have dragged their feet. The responsible companies have already made the capital investments others will have to make in the future. Restaurant companies with equal employment (and service) policies may do better than restaurant companies that court lawsuits from customers or employees.
The issue here is very simple. It has nothing to do with marketing. If we are individuals and have a conscience, do we want to invest our money as though we were sociopaths?
Sadly, the answer appears to be a resounding "Yes." Social Investing has been around for more than 30 years but the total number of socially conscious funds is only 148. Only 4 of those funds have assets of $1 billion or more. So we're a nation of financial sociopaths.
Q. I am approaching retirement age and recently came across the closed end income funds. It seems some are paying 10 to 15% dividends. Are these funds safe and how long could one expect to reap these dividends? Also what happens when they issue a "return of capital" for your dividend? Does this reduce the NAV??
---D.P., by e-mail A. A blanket answer isn't possible since there are many variations in closed end income funds. The highest returns, however, generally come from funds that leverage their portfolio with short-term borrowings. With short-term rates extremely low, the net returns the leveraged funds can pay out have soared.
That's the good news.
The problem comes when short-term interest rates start to rise. The extra return will decline. If short-term rates go high enough, the extra return will disappear altogether. Sadly, blind investor enthusiasm for current yield has priced many of these funds at a significant premium to net asset value. That premium will disappear in a rising interest rate environment.
"Return of capital" payments are a separate issue. Some closed end funds issue a given dividend each year. The dividend is usually a combination of actual investment income and return of capital. As a result, only a portion of the dividend is taxable income.
This may seem like good news but it has a dark side: it decreases the cost basis for your remaining shares. It makes your tax returns complicated and may build future tax liabilities that you don't expect.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing.