RMMZ Dividend Sustainability: Navigating High Return of Capital in a Challenging Market

The RiverNorth Managed Duration Municipal Income Fund II (RMMZ) has long been a staple for investors seeking steady tax-exempt income. Its recent $0.0951 monthly dividend, however, raises critical questions about the sustainability of its distribution policy. With nearly 91% of the April-June 2025 distribution classified as return of capital (ROC)—a practice that erodes investor principal—RMMZ's strategy faces scrutiny. This analysis delves into the fund's reliance on ROC, its structural risks, and what it means for long-term investors.

The Rise—and Slight Decline—of Return of Capital

RMMZ's distribution policy prioritizes stable monthly payments, but this comes at a cost. As of March 31, 2025, only 8.82% of the $0.0951 dividend stemmed from net investment income (e.g., bond interest). The remaining 91.18% was ROC, meaning investors are effectively receiving back part of their initial investment. While this percentage has dipped slightly from 56.19% in 2022 to 55.18% in 2024, the fund's heavy reliance on principal remains a red flag.

Structural Risks: Leverage, Costs, and Performance

RMMZ's structure amplifies its vulnerabilities. The fund employs 42% effective leverage—primarily through debt—to boost income, a strategy that magnifies losses during downturns. Its 5.17% annual expense ratio (among the highest in its peer group) further strains returns.

Consider its performance:
- Since inception (February 2022), RMMZ's NAV has returned just 0.91%, underperforming the Bloomberg Municipal Bond Index's 0.30%.
- The fund's market price trades at a discount to NAV, a sign of investor skepticism.

Why ROC Matters for Investors

A high ROC component poses two critical risks:
1. Capital Erosion: Over time, ROC reduces the fund's NAV, diminishing its ability to generate future income.
2. Tax Implications: ROC lowers an investor's tax basis, potentially increasing capital gains taxes upon sale.

While RMMZ's 7.50% annualized distribution rate at market price is attractive, it's artificially inflated by the discount to NAV. If the discount widens, the sustainability of distributions becomes even more precarious.

Investment Considerations

• Income Seekers: RMMZ may appeal to those prioritizing steady cash flow over capital preservation, provided they understand the risks of ROC.
• Risk-Averse Investors: Avoid RMMZ unless you're willing to accept the erosion of principal and high expense ratios.
• Alternatives: Compare RMMZ with lower-ROC municipal CEFs, such as MUA (Municipal High Income Opportunities Fund), which has a ROC component of ~20% and a lower expense ratio.

Final Analysis

RMMZ's distribution policy walks a tightrope: it delivers consistent income but at the cost of eating into investor capital. While the ROC percentage has stabilized (or even slightly declined), the fund's reliance on leverage and its underperformance relative to benchmarks warrant caution.

For now, RMMZ remains a speculative play for income-focused investors who can tolerate capital loss and high fees. For others, its risks outweigh its benefits. Monitor the fund's ROC disclosures closely—any rise above current levels would signal a critical turning point for sustainability.

Investment Advice:
- Hold or Buy: Only if you prioritize monthly income over capital growth and can accept ROC's long-term effects.
- Avoid: If you need capital preservation or are sensitive to tax liabilities tied to principal returns.

In a market where stability is hard to find, RMMZ's trade-off between income and risk is a stark reminder that no dividend is ever truly “safe.”

Data as of June 19, 2025. Past performance does not guarantee future results.