I just don't get Cornerstone Total Return (AMEX:CRF). More to the point, I just don't get the folks buying into the closed-end fund. They're willing to pay a 103% premium to the company's $9.34 in net asset value (NAV), all for the sake of a beefy dividend that consists partly of their own returned capital.

If I've lost you, I'll make my point clearer. Would you pay me $2.03 for the dollar bill in my pocket? Only if you're dumb, charitable, or ... well, I guess we're back to dumb.

The allure of Cornerstone Total Return is its chunky yield. The fund is currently rewarding its investors with $0.178 per share every month in the form of a distribution -- that adds up to a whopping 11.4% yield. Obviously there aren't many dividend-paying stocks that offer that kind of yield.

Cornerstone's seemingly generous payout consists of a combination of two things:

  • Investment income
  • Return of capital

Given that Cornerstone Total Return has done a poor job of growing its NAV, most of the dividends it's paying are actually returns of capital. In other words, the fund is nibbling into its assets to overpay people who are overpaying in the first place.

Cornerstone recently announced that Total Return would soon begin to tie its payout to investment performance. Sanity? Finally? Not exactly. As this article notes, the company is committed to paying 21% of its NAV in the form of a dividend. So it will continue to have to shave away at its holdings to pay out the inflated distributions. Oh, and that dividend rate will likely be cut if the company can't grow NAV by more than 20% annually through 2008 to keep up with the thinning asset base.

Can that happen? Take a look at Total Return's top holdings and decide for yourself:

  • ExxonMobil (NYSE:XOM)
  • General Electric (NYSE:GE)
  • Citigroup (NYSE:C)
  • Microsoft (NASDAQ:MSFT)
  • Johnson & Johnson (NYSE:JNJ)

Given the current market environment and the fact that the best years for these megacaps are likely behind them, I don't think that's likely.

If you disagree with me, do yourself a favor and just buy into the stocks yourself. Then you can create your own version of the fund, only selling off 10% of your holdings instead of 20% every year to create the fat phantom yield.

The price of paying too much
Whether you are investing in closed-end funds or the more conventional mutual funds, you don't want to pay more than you have to. Shannon Zimmerman, our resident mutual fund guru -- he cut his teeth as a lead analyst at Morningstar before coming over to launch the Motley Fool Champion Funds newsletter service -- agrees.

He scours the mutual fund universe to find the top-performing funds that won't nickel and dime you with fees along the way. In Cornerstone's case, investors are overpaying for the right to their own money. For pricey traditional funds, that means not getting stuck in funds with high expense ratios or burdensome load charges.

This doesn't mean you want to screen for the absolute cheapest funds. Shannon's smarter than that. Even though he describes himself as a "dyed-in-the-wool cheapskate," he will make exceptions for funds that have a good shot at beating the market by a wide enough margin.

"I'm a big fan of expense ratios that fall below 1%," he writes. "Sure, that's an arbitrary number, but at least it's arbitrarily low."

However, Shannon is willing to pay a little more for something like a promising international mutual fund that just doesn't come in a cheaper flavor.

The joys of being arbitrarily cheap
Each fund category has its pricey players. In the closed-end fund space, it's companies like Cornerstone that appear to be overly expensive. I've also recently talked down funds that specialize in Caribbean stocks and dividend capture strategies because of their lofty markups.

In Shannon's space of mainstream mutual funds, the asset nibblers come in several different forms:

  • Load funds with high front- and back-end charges sold mostly through full-service brokers.
  • Managers that favor high portfolio turnover and the associated trading costs.
  • Self-defeating 12b-1 fees because existing investors should foot the fund's marketing tab.
  • High management fees that are the main contributor to steep expense ratios.

Your money is too important to squander it away. Make every investment count. Don't overpay for funds. Trade in dollar bills for shinier dollar bills. It's the best way to make sure that you never get shortchanged.

If you think you shouldn't overpay for a mutual fund newsletter either, go ahead and take Shannon up on a free 30-day trial of his Motley Fool Champion Funds newsletter service. You're worth at least that much.

Longtime Fool contributor Rick Munarriz doesn't own shares in any of the companies mentioned in this story. Microsoft is an Inside Value pick. Johnson & Johnson is an Income Investor pick. The Fool has a disclosure policy.