New Jersey Retirees Secure Double Exemption from Taxes Through This Specific Fund
The Nuveen New Jersey Quality Municipal Income Fund (NXJ), listed on the NYSE, offers investors an attractive starting dividend yield of about 8.5%. However, this high yield comes with a degree of risk, as the fund's heavy use of leverage has contributed to underperformance.
NXJ's strategy involves investing in Tax Obligation/Limited securities, making up 31.1% of total assets. The fund aims to provide current income that is exempt from regular federal and New Jersey income taxes, with at least 80% of its assets invested in securities rated investment grade.
The use of leverage, common among municipal bond funds, can amplify returns by increasing the fund's exposure to municipal bonds. However, it also increases the risk of greater losses if interest rates rise significantly, leading to higher borrowing costs and decreased asset values.
Municipal bond funds, including NXJ, are typically sensitive to interest rate changes. Rising interest rates can lead to decreased bond prices, negatively impacting the fund's performance. Conversely, falling interest rates can increase bond prices, benefiting the fund. The potential for future growth depends significantly on interest rate movements. Future interest rate cuts could serve as a positive catalyst for NXJ, leading to increased demand for municipal bonds and potentially higher returns.
Over the past year, NXJ's share price has declined by about 11.3%, with a total return (including distributions) at a loss of approximately 4%. The fund's net investment income levels have been lower in recent years compared to prior years when interest rates were lower.
The latest section 19(a) notice reveals that the fund heavily leans on return of capital to fuel distributions. This strategy, while providing high yields, is harmful since it actively contributes to NAV erosion over time. It's worth noting that NXJ hasn't generated a sufficient amount of earnings that can outpace the distribution amount for five consecutive years now.
Despite these challenges, the tax-exempt nature of municipal bond income can provide a significant advantage, especially for investors in high-tax states like New Jersey. Shareholders should expect to receive distributions that are not federally taxed and, if they are NJ residents, also exempt from NJ state taxes.
For out-of-state investors, while they would still enjoy federally tax-exempt income, they would not benefit from the state exempt benefit. As of 2021, the fund had total managed assets of $824M spread across approximately 330 different holdings.
Investors should consider the potential risks associated with leverage and interest rate changes when evaluating NXJ. Diversification across different asset classes can help mitigate these risks. It's also important to note that the Fed has left interest rates unchanged, but there is an anticipation of interest rate cuts within the next twelve months, which can serve as a positive growth catalyst for the fund.
In conclusion, while the Nuveen New Jersey Quality Municipal Income Fund offers a high starting dividend yield, investors should be aware of the risks associated with its use of leverage and interest rate sensitivity. Careful consideration is essential when assessing NXJ's potential for future growth.
- To offset potential losses from interest rate fluctuations and leverage, investors might want to consider diversifying their personal-finance portfolio, including investments in education, health, environment, and other sectors.
- While the high dividend yield from NXJ is attractive, it's crucial for investors to remember that part of the fund's income comes from returning capital, which may lead to long-term NAV erosion.
- As the Fed anticipates interest rate cuts within the next year, investors may want to explore investing in personal-finance products or strategies that could benefit from these potential rate cuts, such as municipal bonds, to help grow their wealth.
