Today we’re going to take a look at an unusual closed-end fund (CEF) that offers us a rich 10.5% dividend that comes in (and grows!) monthly. And it sends regular special dividends our way too.
When you add those “bonus” payments to it, this fund often pays out life-changing returns of up to 15%!
fund under consideration is PIMCO Dynamic Income Fund (PDI), A Dividend Titan That Anyone Should Be On Closed-End Fund (CEF) Investor watch list.
Before we go any further, let’s dispel a big myth about PDI—that it can be volatile.
When you look at its assets under management, this appears to be true. But the big downside to 2015, 2016, and 2017 is actually the fund handing out its returns to investors in the form of those big special dividends we saw above. Take them out and you get a lot more consistent performance.
And of course, the fund fell hard in early 2020, as did the market panic, which brought PDI’s assets under management to its lowest point since its inception. However, it turned into a great shopping opportunity. We have another shot at us today, thanks to the merger I touched on earlier.
Merger gives PDI another upside catalyst in ’22
Earlier this year, PIMCO announced that PDI would absorb two of its associate funds, which have now been liquidated. PIMCO Income Opportunity Fund (PKO) And PIMCO Dynamic Credit and Mortgage Income Fund (PCI), of which the latter a. Was CIR The holding — and laneway — of the “new” fund in that service’s portfolio.
With a dividend-coverage ratio of about 105% in the six months prior to the merger, both of those funds were easily maintaining their dividends, which now means both are backing their dividends of PDI into the new, larger fund.
Bottom-line? PDI’s regular dividend is safer than ever and in the next few years, there is a growing possibility of a return of large special dividend, which PDI has judiciously withheld during the pandemic.
This all sounds great, you might be thinking, but what exactly does PDI do?
Capitalizing on an Investor’s “Blind Spot”
Simply put, PDI focuses on a wide variety of debt, from corporate and government bonds to mortgage derivatives, the latter of which make up a third of the fund’s portfolio—and they’re the key to our gains here.
If you were investing during the 2008/’09 financial crisis or if you have seen the movie The Big Short, You might be feeling a wave of nausea right now. Mortgage derivatives, particularly mortgage-backed securities (MBS), were toxic derivatives that nearly hit the global economy in the late 2000s due to mismanagement.
But while he can make the fund sound Like a bad investment, the opposite is actually true. This is due to something called recency bias, or the tendency of investors to think that the most recent crisis will repeat, ignoring the chance that a completely different A crisis we haven’t seen in a long time, or ever could, instead come along.
Think of the old army as, “Generals always fight the last war.”
This is why many investors disapprove of PDI and its huge, safe dividends. This is bad for them, because MBSs were regulated after the financial crisis in a way that made them significantly less risky, and further regulations ensured MBSs don’t explode like they did in 2008. .
This is why investors were unprepared for the COVID-19 pandemic, as the previous financial crisis was barely a decade old, and a pandemic never before had severely affected the markets. (The Spanish flu of 1918 to 1920 had little effect on the stock market at the time, as the world was far less interconnected than it is today.)
Those who made this mistake lost out to the PDI, the extra return it provided before the pandemic, relative to the S&P 500.
another chance to buy
However, this outperformance is returning for another reason this investment is worth looking at right now: the Federal Reserve. You see, in the 2010s, the markets were most affected by the Fed’s monetary policy, especially the way it changed interest rates (low in early 2010, high in late 2010).
PDI handled these dynamics better than any other fund during both regimes, as PIMCO is a strong name in the CEF, and the company attracts talented managers who can learn how to work the Fed’s monetary policy to its advantage. We do.
In 2022 and, I suspect, the Fed’s hand in the markets during the rest of 2020 is going to be much bigger than that of COVID-19 as it starts raising interest rates and investors are more focused on monetary policy than the pandemic. let’s focus. The proof is already here; While the pandemic caused panic in the markets, the Fed’s swift response actually meant stocks Rose In 2020 as the Fed becomes a bigger player, trying to remove all that stimulus without disturbing economic growth, expect the PDI to post even stronger gains.
Michael Foster is Lead Research Analyst Contrarian Outlook, For more income ideas, click here for our latest report”Indestructible Income: 5 Bargain Fund with safe 7.5% dividend.,