We have opined on the Nuveen North Carolina Premium Income Municipal Fund, symbol NNC, for some time in blog posts. It has become our largest long holding by far since about mid-year 2014. In fact it is now our largest position ever in any security. We will explain our reason for purchase and adding to that purchase for some time now in the paragraphs below.
Let's state that we believe the most advantaged holdings one can be invested in currently is a strong position in large cap stocks via mutual funds and we highly suggest Vanguard. MGV and MGV are excellent mega cap funds with VFIAX as a alternative in the mix. We have explained this idea in our postings on the political economy as this being your investment for capital gains. NNC offers solid safe current income for the income part of your portfolio.
NNC is a municipal fund that is tax free for both state and federal taxes. Our purchase price average would place our yield right at 4.9% , or 7% taxable yield for someone in the 25% bracket. NNC has bonds issued by numerous government agencies such as for building schools, operating airports, putting in water and sewer lines, and running hospitals. These bonds are backed by the full taxing power of towns and counties in North Carolina, backed by the ability of those government agencies rate raising power, and lastly by the assets of those towns, counties, and facilities they operate. That safety is strong and frankly as good as any US government bond out there. Therefore NNC is as good as buying any government bond.
NNC invests in BBB rated bonds and up. That means the portfolio is what is known as investment grade. The fund is closed end in that once the fund was fully sold they do not need to go out and find more bonds when new money comes into the fund since there is never any real new money. However the fund sells on the market with a bid/sell quote everyday so shares can be bought and sold by anyone at a price making it easy to sell and easy to buy. That means the bond portfolio which has has a par value at which the bonds would be normally called can sell higher or lower than that par value. That closed end feature is why we like this fund as we are relived of any worry of seeing the bond portfolio have to sell off bonds before maturity due to redemptions.
Therefore the selling price is set by market conditions and demand for the fund. Market conditions since about this time last year has been below par value. In fact the fund has consistently sold at around 12% to 14% below par value for over one year. The concerns about rising interest rates and what Congress might do to municipal finances has pushed down the selling price of NNC and pushed up the yield. We believe those concerns to be overblown by investors and consider NNC to be an excellent buy in today's environment. Frankly with the concern about rising interest rates one only needs to look at mortgage lending in this country now and how rates are being held down due to consumer rejection of rates each time banks try to move them upward. Not only do we see a almost 5% tax free yield, we see some nice capital gains as well eventually. We personally have achieved a 10% gain in the value of our shares since we began buying them in January of 2014, plus a 4% dividend on the share bought. 14% is not bad for a 9 month holding in a government guaranteed bond.
Better yet we see additional gains ahead. The fund has bumped up their dividend 5% this year and there could be some additional dividend increases in the year ahead. Plus the shares are still selling about 12% below par value. So that means there is still time to take advantage of some money to be made in NNC. NNC not only buys bonds, but they also use some leverage in this closed end fund by buying some bonds on the market with low cost short term money boosting their payout and the chances for some additional capital gains. Yes there is some risk there if rates move up, but this investor does not see any chance of that happening to any extent real soon.
Finally do your due diligence in this security, but note that NNC has a long track record of over 20 years. That range has seen almost all market conditions. In that time NNC has only paid 2 months below 5 cents per share and that being 4.9 cents. During that time the fund has only once traded this far below par value.
Closed end municipal bonds funds are in the sweet spot of this cycle now. Capital appreciation, guaranteed income, and high yield are a combination that is hard to beat. As long as we have a no growth economy with large cap companies preferring profits over growth due to the political economy NNC will do well. If this fund sells off again we would look to add at least one more purchase in NNC.
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