High yield securities such as MLP’s, mortgage REITs, long term bonds and dividend stocks provide excellent income opportunities for investors. However, the current economic weakness and volatility of the equity markets can often leave investors with a capital loss greater than a year’s worth of dividend checks.
For those who have a shorter time horizon or like to have tight stops on positions, PIMCO’s high income closed ended funds may be a legitimate alternative. Instead of paying quarterly, PIMCO pays out monthly dividends that on an annualized basis are competitive with other high yield products with an average yield of over 8%. Below I list four of the leading PIMCO high yield funds and highlight the key attributes investors need to know before buying.
PIMCO High Yield Income Fund (PHK) - This ETF provides the highest yield at 11.48%. PHK primarily comprises of high yield U.S. corporate bonds that have a weighted average credit rating of BB. Junk bonds tend to be high risk, but with a historical default rate of 10%, the expected return net of losses of this fund still exceeds 10% on an annual basis. In addition, the volatility and price patterns tend to mimic the other PIMCO funds despite the higher risk levels.
PIMCO Strategic Global Government Bond Fund (RCS) - Even though this is a global bond fund, it lacks any significant European sovereign debt exposure. Most of the fund’s holdings consist of mortgage pass through securities. The fund has a leverage adjusted duration of 9.11 (4.4 unadjusted) and weighted average credit rating of BBB. However, 60% of them are AAA (nevertheless, the credit rating of MBS's cannot be taken at face value). It also pays a strong yield of 8.48%.
PIMCO Global Stocks Plus Income Fund (PGP) - Its yield at 11.15% nearly matches the High Yield Income Fund, but provides both geographical diversification and holdings outside of bonds. Despite the high yield, the PGP has the highest cash ratio of 33.78% of the total portfolio. It is also the only portfolio on the list that includes exposure to U.S. and International equities (23% and 33% of portfolio respectively). Exposure of 18% of its assets in European securities makes me lean toward buying the high yield fund over this one.
PIMCO Corporate Opportunity Fund (PTY) - Unlike other bond funds listed in this column, the PTY investment target includes a focus on capital gains along with paying out a 8.41% dividend yield. Its largest holdings are U.S. corporate bonds (36% of portfolio) and municipal debt (31% of portfolio). The overall duration of the portfolio is 6.91 and most of the holdings also have maturities greater than 20 years.
Out of all these funds, I recommend the PIMCO High Yield Income Fund because it offers the best combination of high dividend yields and limited downside compared to competing funds. Technically, these funds seem to be near the top of a six-month downward channel and have bearish moving average indicators. As a result, I recommend waiting until early December when these funds complete their current 10%-plus pullback. Nevertheless, I believe that these funds are great alternatives to income generating equity due to the holding period flexibility offered by a monthly payout schedule and no sacrifice in yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.