This fund is a special dividend machine (and it’s earning 10.5% now)
TToday we’re going to take a look at an Unusual Closed End Fund (CEF) that pays us a rich 10.5% dividend that comes to us monthly (and growing!). And that sends us special dividends on a regular basis.
When you add these ‘bonus’ payments this fund often pays life changing returns of up to 15%!
The fund in question is the PIMCO Dynamic Income Fund (PDI), a dividend titan that should be on any closed-end fund investor’s (CEF) watchlist. (In fact, if you’re a subscriber to Contrarian Income Report, a sister of my CEF Insider service, you’re already familiar with PDI – it recently landed in the CIR wallet thanks to a merger which we’ll talk about a little bit later.)
PDI’s assets are more stable than they appear
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 seems to be true. But those big declines in 2015, 2016, and 2017 are really just the fund returning its returns to investors in the form of those big special dividends we saw above. Take them out and you get much more consistent performance.
And of course, the fund fell sharply in early 2020, as did the market panic, which took PDI’s assets under management to their lowest level since inception. This, however, turned into a tremendous buying opportunity. Today we have another blow in front of us, thanks to this merger that I mentioned earlier.
A quick return to form
Merger Gives PDI Another Upward Catalyst in 22
Earlier this year, PIMCO announced that PDI would absorb two of its sister funds, the now defunct PIMCO Income Opportunity Fund (PKO) and the PIMCO Dynamic Credit & Mortgage Income Fund (PCI), the latter of which was an asset of CIR . and the path of the “new” fund in the portfolio of this service.
Both of these funds easily maintained their dividends, with dividend coverage ratios of around 105% in the six months leading up to the merger, which now means both are supporting PDI dividends in the larger new fund.
The essential ? PDI’s regular dividend is safer than ever, and over the next several years the return of large special dividends, which PDI cautiously withheld during the pandemic, seems increasingly likely.
You might think this all sounds awesome, but what does PDI actually do?
Take advantage of an investor’s “blind spot”
Put simply, PDI focuses on a variety of debt, from corporate and government bonds to mortgage derivatives, with the latter making up one-third of the fund’s portfolio – and these are the key to our earnings here.
If you invested during the 2008/2009 financial crisis or watched The Big Short movie, you may be feeling nauseous right now. Mortgage derivatives, especially Mortgage Backed Securities (MBS), were the toxic derivatives that nearly brought down the global economy due to mismanagement in the late 2000s.
But while this may give the impression that the fund is a bad investment, the opposite is actually true. This is because of what’s called recency bias, or the tendency of investors to think that the most recent crises will repeat themselves, while ignoring the possibility of an entirely different crisis that we haven’t seen. for a long time, or never, could happen instead.
Think of the old military adage: “Generals always fight the last war.
This is why many investors have snubbed the PDI and its huge, sure dividend. This is a shame for them, because MBS were regulated after the financial crisis in a way that made them considerably less risky, and new regulations ensured that MBS did not explode like in 2008.
This is also why investors were not prepared for the COVID-19 pandemic, as the last financial crisis was barely a decade ago and a pandemic had never seriously affected the markets before. (The Spanish Flu from 1918 to 1920 had little effect on the stock market then, as the world was much less interconnected than it is today.)
Hidden cost of recency bias
Those who made this mistake lost the additional PDI returns delivered before the pandemic, compared to the S&P 500.
Another buying opportunity is coming
However, this outperformance is coming back for the second reason this investment is worth the trip now: the Federal Reserve. You see, in the 2010s, the markets were impacted the most by the Fed’s monetary policy, particularly the way it changed interest rates (low in the early 2010s, higher in the late 2010s). 2010s).
PDI played this dynamic better during both regimes than any other fund, as PIMCO is a strong name in CEFs, and the company attracts talented managers who know how to use the Fed’s monetary policy to their advantage.
In 2022 and, I guess, for the rest of the 2020s, the Fed’s hand in the markets will be much larger than that of COVID-19, as it starts to raise interest rates and investors become much more focused. on monetary policy than on the pandemic. The proof is already there; While the pandemic has caused panic in the markets, the Fed’s swift response actually increased stocks in 2020. As the Fed becomes a bigger player, trying to remove all of these stimulus without disrupting economic growth, hold on. make sure that the PDI shows even greater gains.
My 4 best CEFs to buy for 2022: 7.5% dividends, more than 20% future earnings
I’ll be honest: My 4 favorite CEFs to buy for the coming year aren’t making as much as the PDI – but they still pretty much crush every other income option, with their massive 7.5% payouts!
And here’s the real boost: Unlike PDI, which trades at a premium to NAV (NAV, or the value of investments in its portfolio), my top 4 picks are trading at ridiculous – so ridiculous discounts. that I expect each of them to post more than 20% price gains before the 2022 release, to go along with their rich 7.5% average payout.
Now is the time to buy these 4 funds. Go here and I’ll give you all the details – names, tickers, current yields, dividend frequencies (some of these robust picks pay monthly!) And a full breakdown of their portfolios.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.