Tax-Free Income in a Volatile Market: BNY Mellon's DSM and LEO Offer Stable Dividends Amid Rate Uncertainty

Investors seeking tax-exempt income in a low-yield environment often turn to municipal bonds, but closed-end funds (CEFs) like BNY Mellon's DSM (Strategic Municipal Bond Fund) and LEO (Strategic Municipals, Inc.) add a layer of complexity—and opportunity. Both funds have maintained a steady $0.023 monthly distribution since June 2025, defying market volatility and signaling resilience in their dividend policies. With the July 14 ex-dividend date looming, this article evaluates how DSM and LEO balance stability, risk, and value for income-focused portfolios.

The Case for Stability: $0.023 Distributions Hold Firm

The most compelling feature of DSM and LEO is their unwavering dividend consistency. Both funds declared a $0.023 monthly distribution as of June 2025, unchanged from the prior month—a rarity in a market where many fixed-income assets face pressure from rising rates and liquidity strains. This stability stems from their focus on high-quality municipal bonds (over 78% rated AA or higher), which provide predictable cash flows.

For context, the annualized yield on DSM's shares (based on the current $5.55 price) is 4.97%, while LEO's yield stands at 4.75%. These figures are tax-free at the federal level, translating to a tax-equivalent yield of over 6% for investors in the 37% tax bracket—a powerful edge over taxable bonds.

Valuation: Discounts Offer a Margin of Safety

Both funds trade at discounts to their net asset value (NAV), a common feature of closed-end funds but one that presents an intriguing entry point. As of late June 2025:
- DSM's NAV is $6.17, with shares priced at $5.55, a 10.05% discount.
- LEO's NAV is $6.52, trading at $5.81, a 10.89% discount.

While these discounts are narrower than the 11% historical averages, they still suggest potential upside if investor sentiment improves. The funds' 30-35% leverage amplifies returns but also increases volatility—this dual-edged sword means discounts could widen if rates rise sharply.

Why BNY Mellon's Expertise Matters

BNY Mellon's $2.0 trillion in assets under management and 30+ year history with these funds provide a critical edge. The firm's ability to navigate municipal markets—leveraging its deep bond expertise and infrastructure—has kept distributions intact despite macroeconomic headwinds. For instance, DSM and LEO's portfolios prioritize long-duration bonds (DSM's average maturity is 20.7 years), which benefit from stable or falling rates.

This strategy aligns with expectations of Fed rate cuts in late 2025, which could reduce bond market volatility and support prices. However, investors must weigh this against the high expense ratios (2.87% for both), which eat into NAV growth over time.

Risks to Consider

• Interest Rate Sensitivity: Both funds' long-duration bonds make them vulnerable to rate hikes. A sudden spike in yields could depress NAVs.
• Leverage Risks: Their 30-35% borrowings boost returns in favorable environments but amplify losses during downturns.
• Discount Persistence: There's no guarantee discounts will narrow, especially if broader CEF markets remain under pressure.

The Ex-Dividend Date: Timing Matters

The July 14 ex-dividend date is critical for tax planning. Investors must own shares by this date to receive the July 31 payout. For those in high tax brackets, locking in these distributions before year-end could maximize after-tax returns.

The Bottom Line: A Core Holding for Tax-Efficient Income

DSM and LEO are not for the faint-hearted. Their complexity—leveraged structures, NAV discounts, and sensitivity to interest rates—requires careful analysis. However, their tax-free yields, consistent distributions, and BNY Mellon's management make them compelling for long-term income portfolios, particularly in a low-yield world.

Investment Advice:
- Buy: Consider DSM and LEO if you're targeting tax-exempt income and can tolerate price swings. The discounts offer a cushion against NAV declines.
- Hold: Existing investors should weigh the yield vs. expense drag—the funds' distributions are strong, but high fees could limit capital gains.
- Avoid: Steer clear if you're a short-term trader or cannot stomach leverage-driven volatility.

In a market hungry for safe income, these funds' stability and tax benefits carve out a niche—but investors must understand the risks.

Data as of June 26, 2025. Past performance does not guarantee future results. Consult a financial advisor before investing.