Evaluating the Long-Term Viability of Neuberger Berman Next Generation Connectivity Fund's 8.1% Yield

The Neuberger Berman Next Generation Connectivity Fund (NBXG) offers an 8.1% yield, a compelling proposition for income-focused investors. However, the fund’s ability to maintain this yield hinges on its distribution policy, which blends net investment income, capital gains, and return of capital. This article examines the sustainability of NBXG’s yield through its investment strategy, distribution mechanics, and tax implications, while assessing its appeal in today’s market.

Distribution Policy and Yield Composition

NBXG operates under a level distribution policy, targeting $0.10 per share monthly, or $1.20 annually [1]. While this consistency is attractive, the fund’s distributions are not guaranteed to be fully sourced from net investment income (NII). Instead, they may include capital gains and return of capital (ROC), which carry distinct risks for long-term sustainability.

For example, in 2025, the fund disclosed that its distributions could include a mix of NII, capital gains, and ROC, with final tax characteristics determined post-year-end [2]. Historical 19a-1 notices—mandatory informational disclosures under Section 19 of the Investment Company Act of 1940—suggest that ROC and capital gains often constitute a significant portion of distributions [3]. This reliance on non-income sources raises concerns: ROC reduces shareholders’ cost basis, potentially increasing future tax liabilities, while capital gains depend on market conditions and the fund’s ability to realize gains from its portfolio.

Investment Strategy and Income Stability

NBXG’s focus on next-generation connectivity technologies—such as 5G infrastructure and satellite networks—positions it to capitalize on growth sectors. However, these investments are inherently volatile and may generate inconsistent cash flows. The fund’s portfolio includes non-U.S. and emerging-market companies, which adds exposure to geopolitical and currency risks [4].

The fund’s ability to sustain NII is further complicated by its limited-term structure. As a closed-end fund with a fixed maturity date, NBXG must liquidate assets over time, potentially triggering capital gains distributions. This liquidity constraint could force the fund to prioritize capital gains over income generation, exacerbating the reliance on non-NII components.

Tax Implications and Investor Considerations

For income-focused investors, the tax treatment of NBXG’s distributions is critical. While NII is taxed as ordinary income, capital gains are subject to higher rates, and ROC reduces the investor’s cost basis without immediate tax consequences [5]. The fund’s 19a-1 notices provide estimated breakdowns, but these are not binding for tax reporting until the year-end Form 1099-DIV is issued [6]. This uncertainty complicates tax planning, particularly for investors in higher tax brackets.

Moreover, the fund’s use of ROC could erode principal over time. If distributions consistently exceed NII, shareholders may effectively be receiving a return of their initial investment rather than earnings. This dynamic could undermine the fund’s long-term appeal, especially for conservative investors seeking capital preservation.

Market Environment and Risk Assessment

In today’s low-yield environment, high-yielding funds like NBXG are in demand. However, the fund’s strategy introduces several risks:
1. Interest Rate Sensitivity: Rising rates could pressure the fund’s debt-heavy portfolio, increasing borrowing costs and reducing cash flows.
2. Market Volatility: The tech sector’s cyclicality means capital gains may fluctuate significantly, affecting distribution stability.
3. Liquidity Constraints: As the fund approaches its maturity date, forced asset sales could lead to larger-than-expected capital gains distributions.

Conclusion

NBXG’s 8.1% yield is enticing, but its sustainability depends on the fund’s ability to balance NII with ROC and capital gains. While the fund’s focus on high-growth sectors aligns with long-term technological trends, its distribution policy and tax structure pose risks for income-focused investors. Those considering NBXG should weigh the potential for capital appreciation against the erosion of principal via ROC and the tax inefficiencies of capital gains. In a market where yield preservation is paramount, NBXG’s strategy may appeal to risk-tolerant investors but requires careful scrutiny for those prioritizing long-term income stability.

Sources:
[1] Neuberger Berman Next Generation Connectivity Fund, [https://www.nb.com/en/us/products/closed-end-funds/neuberger-berman-next-generation-connectivity-fund]
[2] NEUBERGER BERMAN NEXT GENERATION..., [https://www.prnewswire.com/news-releases/neuberger-berman-next-generation-connectivity-fund-announces-monthly-distribution-302542150.html]
[3] Closed-End Fund Distribution Notices (19a), [https://www.nb.com/it/us/closed-end-funds-19a1-notices]
[4] Neuberger Berman Next Generation Connectivity Fund, [https://www.nb.com/en/us/products/closed-end-funds/neuberger-berman-next-generation-connectivity-fund]
[5] What Is IRS Form 1099-DIV: Dividends and Distributions?, [https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-irs-form-1099-div-dividends-and-distributions/L8tWOrCJV]
[6] Closed-End Fund Distribution Notices (19a), [https://www.nb.com/it/us/closed-end-funds-19a1-notices]