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BDC CEF: High Yield Play Or Wealth Destroyer?

Published Wed, 11 Jul 2018 11:06:25 -0400 on Seeking Alpha

The First Trust Specialty Finance and Financial Opportunities Fund (FGB) Main thesis In spite of a high yield and a well-covered distribution, investors should be careful with this closed-end fund. First Trust is a highly regarded portfolio manager and they have done a great job with its investment selection but the holdings have pretty significant downside risk. The underlying fundamentals are OK and the U.S. economy is healthy for now but the fund will test the patience of even aggressive investors. It's possible that FGB is cheap enough to merit investment consideration for value seekers but you should hedge bets with treasury bonds.
Fund Highlights • Targeted exposure to the BDC and mREIT sectors
• Exclusive allocation to U.S. middle market companies
• Offers a high annual yield that is paid in 4 installments
Assessing the distribution
(Source: Original Image – Data from Yahoo Finance)
Despite commencing operations at an inopportune time, the distribution offered by this fund has remained consistent in the years following the Great Recession. Because the underlying holdings are mostly lending companies, the income generated is mostly taxed as ordinary income. Regardless of the lack of tax benefits, FGB has been able to consistently generate an impressive yield for today’s low interest rate environment. Granted they do use a modest amount of leverage to enhance returns, FGB boasts a 1-year trailing yield of 9.75%. In... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
CYPRESS SHARPRIDGE INV 6.32   6.0 1.05 1.00 15.15
PENNANTPARK INVESTMENT 6.95   9.9 0.70 0.72 10.10


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