This article will focus on a way that investors can gain exposure to a high yielding fund, PIMCO Global StocksPLUS & Income Fund (PGP), and the attractiveness of this investment option. As an investor who consistently searches for stocks, ETFs, and other funds that offer dividends, a fund that comes up on my radar is PGP because it is currently yielding just under 10% annually, with a dividend of .$1834/share. Unlike most dividend paying U.S. based stocks that pay their dividends quarterly, this fund returns dividends to investors on a monthly basis. In my opinion, this makes the fund more attractive because it pays out on a more frequent basis, which gives you access to cash (or reinvested stock) with less waiting time. The fund took a big hit towards the end of 2012 when Congress and the White House were debating an increase in taxes on dividends, but since then the fund has rebounded sharply. Year-to-date PGP has over 23%, excluding dividends. Over the last year, the fund has returned close to 6.5%, in an addition to an yield of close to 10%.
While the fund has done well recently, I wanted to review it more in-depth to see if it was an appropriate investment pick. While the dividend yield is intriguing, I want to see how sustainable the dividend payment is. With a high yield, it's important to see how long it has been paid out, which can help to determine if it has a good chance of continuing to be paid in the future. Companies (or funds) that over-extend themselves with their dividends could face cash problems if not managed properly. PGP was initiated in 2008 and has paid the same dividend of at least $.1834 since its first month and every month ever since. With no plans to decrease the dividend, according to the fund's most recent annual report, the likelihood of payments in the future is high, which is very encouraging for dividend-seeking investors.
A little more about PGP. It is managed by Allianz Global Investors Fund. PGP holds stocks and other derivative instruments that have economic characteristics similar to both U.S. and non-U.S. stocks. This includes options, such as credit default swaps, common stocks, and fixed income securities such as corporate and government bonds. The fund is diverse in its holdings, with sectors such as insurance, oil, airlines, defense, real estate, and building materials. The fund is also overweight in financials, with a large percentage in banking and financial services. This contributed to the fund's severe drop during the recession but also its strong comeback as the financial sector has performed strongly this year.
The holdings of the fund do raise some concerns. According to PGP's 2012 annual report, 35% of the fund's holdings are rated A or better by Moody's rating services. 15% of the holdings are Caa or worse, and 18% are not rated. This is not surprisingly given the fund's desire to return a high yield; it must take on some risk in order to do so. The fund is composed of about 54% in corporate bonds. 25% of these bonds are in financial services or banking. The rest are airlines, health insurance companies, real estate, and retail, among some others. The higher grade holdings of the fund are just over 35% U.S. backed agency securities. While these holdings do not generate the highest yields, this helps balance out some of the riskiness of the fund.
For most of my dividend picks, I prefer funds or stocks that are less volatile than the market and can afford to pay large dividends because of reliable revenues or a large cash reserve. This fund appears to return a higher yield by taking on investments that are below investment grade, which means it will be very much at risk if the market tanks. This is reflected in its beta, which is 1.31, making it more volatile than the market as a whole. This compares with betas of my popular funds SPDR S&P Dividend (SDY) and iShares Dow Jones Select Dividend (DVY) which are each below 1.
All things considered, you get what you pay for with PGP. While the fund has paid out a reliable dividend since its inception, this yield comes at a price. Investors are taking on more risk than the overall market, which is not a common characteristic of a typical dividend paying stock or fund. While the fund has returned close to 10% in dividends per year, the stock appreciation has been weak. Since 2008, excluding dividends, the fund has lost 1.5%. Bottom-line is, other funds exist that, while they pay a smaller dividend, offer a total return that rivals or exceeds PGP, all while being less risky. While PGP does offer an opportunity for a risk-seeking investor to gain some diversified exposure to domestic and international financial services and government debt, investors should proceed into this fund with caution.