What could be wrong with buying a fund with a "managed" distribution policy? After all, this policy is a promise to pay you a fixed amount every month or quarter. Many closed-end funds adopt this policy to make their distributions -- and hence their share prices -- more stable. Here's how it works:

To avoid taxation, many closed-end funds return most of their income to shareholders. The problem is their income (especially the capital gains portion) can vary greatly from month to month. As a result, dividend payments to shareholders may also vary. Since the market hates uncertainty, particularly when it comes to dividend payouts, a fund's share price could suffer if its dividends fluctuate significantly.

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Some funds attempt to avoid this problem by employing a "managed" distribution policy. By pegging the distribution to a certain percentage of its portfolio value (usually around 10%), fund managers can keep shareholders happy with regular, reliable payouts.

That's the good news. But you've got to ask where the cash to pay dividends comes from, if the entire payout isn't necessarily from regular interest income or capital gains.

Aye, there's the rub. When the fund promises investors more than it earns from investment income or capital gains, it generally makes up for the shortfall by dipping into investment capital. Imagine if you consistently dipped into your savings instead of letting it generate interest income. You would gradually erode your capital base, leaving less and less to generate interest for you in the future.

The same thing happens when a fund manager chips away at the fund's portfolio capital to pay out dividends. If the practice continues for long periods of time, it can reduce the fund's net asset value (the value of all the fund's holdings), which may eventually hurt the share price.

That reasoning was behind our decision to sell Cornerstone Total Return (AMEX: CRF, $18.30) in our September 2006 issue of High-Yield Investing. You can see the dramatic decline in the fund's portfolio value from the chart below.

Surprisingly, the chart also shows how the shares have continued to attract yield-starved investors, despite shrinking portfolio values. As a result, the shares are selling at a lofty premium to what the fund is really worth -- a situation that we believe is unlikely to last for very long.

Not all funds with a managed distribution policy should be off-limits, though. Instead, investors should evaluate how each individual fund derives the capital it distributes to shareholders. An important feature to look for in a fund with a managed distribution policy is if the portfolio value is increasing or at least holding steady. This shows that the security should have plenty of assets to allow it to make payments well into the future.

Although there is significant risk associated with managed distribution policies, if you're seeking to juice portfolio returns, then the dozen or so funds we've listed below may be of interest to you. They each carry yields of 8% or more, and we've carefully handpicked them. Each fund enjoys a stable or growing portfolio value, as well as a share price that is trading in sync with its net asset value . . .

Important Note:  Throughout the remainder of this article, editor Carla Pasternak provides a list of her 14 top picks with a managed distribution policy.  However, in order to view the remainder of this article, you'll need to subscribe to our premium income-oriented newsletter -- High-Yield Investing. After you subscribe you'll receive immediate access to this full article, as well as our monthly High-Yield Investing newsletter and a host of additional premium content. Please visit one of the following links to continue...

Good investing!

Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com

Carla has been employed in the investment industry for more than two decades. In addition to her work as a writer for several other nationally recognized financial publishers, her previous experience includes a position as President of a well-respected investor relations firm. She has also been writing shareholder reports for public companies (annual reports, speeches, corporate profiles, slide shows, etc.) since 1980.

A highly successful investment analyst, Carla specializes in high-yield, income-paying stocks. In that pursuit, she's always mindful to select companies that not only pay rich dividends, but that also have the potential to deliver strong long-term capital gains.

On the educational front, Carla holds both MBA and Ph.D. degrees. When she's not watching the market, she's teaching business courses at the college level and managing several million dollars in portfolio assets.

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