NEA - NAD: Undercovered Dividend Suboptimal But Not Yet A Reason To Sell
2024-06-17 12:39:21 ET
Summary
- Recent large dividend hikes in Nuveen closed end muni bond funds now have NAD paying out two times what it is earning in investment income.
- Overdistribution erodes a fund's net asset value and earnings power over time.
- In the short term, the narrowing discount to NAV and the prospect for declining leverage cost from interest rate cuts make NAD a Hold.
The Market Finally Takes The Bait
Six months ago, I compared levered and unlevered municipal bond closed end funds from Nuveen using Nuveen Quality Muni Income Fund ( NAD ) and Nuveen Select Tax-Free Income Portfolio ( NXP ) as examples. These funds have produced similar total returns in the long run, but I expected NAD to do better during a rate cutting cycle. The theory was that the levered NAD would see its net investment income improve more as the fund's cost of leverage drops while its long-duration holdings see minimal income declines and price appreciation....
NAD: Undercovered Dividend Suboptimal But Not Yet A Reason To Sell