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PCI: A Must-Own CEF Yields 8.5% For Volatile Times

Mar. 10, 2020 8:35 AM ETPIMCO Dynamic Income Fund (PDI)PTY296 Comments


  • A key part of building an income stream is to have core investments that can be counted on to be reliable in any conditions.
  • When looking at CEFs, we want a high-quality manager, a good strategy and proven income generation.
  • This CEF consistently hits all of our targets.
  • PCI offers an 8.5% yield with lower price volatility.
  • Looking for a portfolio of ideas like this one? Members of High Dividend Opportunities get exclusive access to our model portfolio. Get started today »

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At High Dividend Opportunities, some might say we are obsessed with dividends. When we think about it, we are guilty as charged. Your brokerage account will focus on the big number, that number will change second to second, and it's a measure of how much money you would have if you had sold every stock in your portfolio at a specific point in time.

Investors will put great weight on that number, even when they have no intention of selling anytime soon. Even though anyone who has invested through a few bear markets, through the flash crash, through a few waves of panic, is all too keenly aware of how quickly that number can change for the worse.

For most people, what's the ultimate purpose of their investment accounts? In most cases, it's to provide an income during retirement, so that when they are unable or simply no longer wish to work, they do not need to sacrifice their standard of living.

We focus on building an income stream. After all, if income is what you need, why wouldn't generating income be your primary focus? A large part of our strategy is to invest in funds that can be relied on to provide stable income in a variety of economic conditions. Through a bubble bursting, housing collapse, coronavirus or whatever fears the market is reacting to, we want to know that our dividend payment is coming in.

PIMCO Dynamic Credit and Mortgage (PCI) is one of five "must-own" funds that we have in our model portfolio. This is a super high-quality fund that we can rely on to provide us with a stable dividend through a wide variety of macro-economic conditions. PCI pays a monthly dividend of $0.174, for a yield of 8.5% at current prices. Additionally, PCI

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This article was written by

Rida Morwa profile picture

Rida Morwa is a former investment and commercial Banker, with over 35 years of experience. He has been advising individual and institutional clients on high-yield investment strategies since 1991.

Rida Morwa leads the investing group High Dividend Opportunities where he teams up with some of Seeking Alpha's top income investing analysts. The service focuses on sustainable income through a variety of high yield investments with a targeted safe +9% yield. Features include: model portfolio with buy/sell alerts, preferred and baby bond portfolios for more conservative investors, vibrant and active chat with access to the service’s leaders, dividend and portfolio trackers, and regular market updates. The service philosophy focuses on community, education, and the belief that nobody should invest alone. Lean More.

Analyst’s Disclosure: I am/we are long PCI, PYY, PDI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (296)

Rida I am looking for the "portfolio characteristics" table you show above updated for March 31st, 2020. Can you (or anybody here) point me to it? thanks in advance, DJ
6019791 profile picture
I'm not sure what Rida wrote, but Morningstar has very good coverage of CEFs most of which is not behind the paywall. On the 'details' ribbon you can see Portfolio and Portfolio holdings which should tell most investors what they want to know.
Buy_low_sell_high profile picture
curious if Monday was the bottom...we shall see. just nibbling slowly. this stimulus should provide a great boost.
Just wondering, if the bill goes through suspending potential mortgage payments, This could affect these funds massively with lost payments for a while. Along with PDI. Especially if its for a whole year.
PendragonY profile picture
There is no intention of suspending mortgage payments, rather they are making so if you do end up missing mortgage payments you have time to make them up before they take your house.
That being said, NAV is still falling on a daily bases. I think we are now trading at a Premium to NAV. NAV can recover, but it still doesnt give me the feels that we hit a bottom in the bond market.
PendragonY profile picture
@User 38929656

No, NAV went up the last 2 days.
HaroldRamis profile picture
Leverage means you're taking on extra risk , and hope things don't go sideways

When they do you lose at an accelerated rate

PendragonY profile picture

Most companies use leverage. PCI isn't using that much. KO uses about the same.
HaroldRamis profile picture
Not saying they don't

95% of them tanked as well.
tgar13 profile picture
Who would recommend a leveraged Bond Fund at a time like this?
Highly leveraged. 54%
PendragonY profile picture

Highly leverage is 2x or 3x, this fund isn't highly leveraged.
@PendragonY Would you be comfortable if your personal portfolio had 54% leverage? I certainly wouldn't be, especially now.
PCI down 39% with no end in sight since the appearance of this article.
AI - Alternative Investing profile picture
Currently as of today PCI sports a 12.8% yield on NAV, the current annual distrib of $2.09 may be a stretch to earn/maintain. We will see shortly.
PendragonY profile picture
Again, the yield is irrelevant, it is the actual dollars that matter. And the yield can decrease by the NAV going UP.
AI - Alternative Investing profile picture
Ask Douglas Albo directly if he thinks "yield on NAV" in excess of 12% is a warning sign for a potential distribution cut to a cef.


How many CEFs can you name where the NAV has gone up in the last 30 days?
Regardless of opinions, we shall see very soon!
Whispers of Wisdom WOW Archive profile picture
@Rida Morwa In re: PCI 50% leverage is a little high but manageable with FED intervention now solidly in place. I did not have one CEF fail in 2008/2009. They, on balance rallied 80 to 90% in 2009 and then went to profitable in 2019-2010. I think we will find that corporate bonds end up better than the common stocks in this mess. If the common stops paying, the bonds must pay unless the company goes into bankruptcy. Even then, the bondholders get something, usually. Remember FNMA ? The pfd shares went with the common...(Almost worthless) the bonds paid and are still paying. Peace, LAN
Mr. Morwa:

Still wondering if you still prefer PCI? Would welcome your thoughts.

Retired investor
bobholt profile picture
@Rida Morwa

With PCI leverage over 50%, isn't this a bit too much risk now (compared to when you wrote the article?

I don't think I've ever seen a CEF with that much leverage. Maybe we should trim a bit?
@Holtgraver I think PCI typically has leverage in the 40% range, but that percentage has climbed as the NAV has crashed along with the market. I believe that by law, CEFs are only allowed to maintain 50% leverage, so with current leverage at nearly 55% PCI may have to deleverage a bit.

My own rule of thumb is to only buy funds with 33% leverage or less (when making the initial purchase). But it all comes down to your risk tolerance.
$$$ and sense profile picture
The biggest risk with CEFs in my opinion (other than a continued plunge in share price), is the risk to current distribution amounts. Yields that are now 20% or more may be put under the microscope for a distribution haircut. There are a lot of great CEFs that are at bargain basement prices and may offer some substantial price increases over the months to come. But as for the current dividend yields ... some may be too rich.
PendragonY profile picture
@$$$ and sense

Yields having nothing to do with it. CEFs will continue to pay the dollar distributions they do unless they can't support them. Whether that is a yield of 5% or 20% is irrelevant.
Whispers of Wisdom WOW Archive profile picture
@Rida Morwa I said this was coming. FED to buy $4.5 Trillion in Corporate debt.

The short sellers will lose as will the hedge funds that have tried to destroy this market.

The FED cannot lose by doing this. The US Treasury made a fortune buying equity and debt in 2008-2012.

@Whispers of Wisdom - who needs short sellers and hedge funds to try and destroy this market when it is the over levered corporations themselves doing a great job of it with their obscene debt gluttony
Whispers of Wisdom WOW Archive profile picture
@Rida Morwa All we need to know about the leverage disaster and how we should end up just fine as long as we are not over levered. Here is recap of the leverage issue for this last several weeks. I think the task at hand will be determining which companies are doing the right things on the leverage side of the equation. PCI might be the best buy of the decade if PIMCO does this right. PLEASE SEE THIS from Bloomberg: www.bloomberg.com/...
How’s that fat premium working out these days? I’ve bookmarked the PCI posts to remind myself in the future why big premiums “don’t matter”.
PendragonY profile picture

They certainly do matter, but that doesn't mean they are fixed in stone. And I actually prefer to own funds that trade at a premium. I just want to BUY them at a discount.
GetRealHere profile picture
Found new bottoms in all of PIMCOs CEFs today the hour before closing. Picked up positions in PCI, PDI, PMX, PML, NVG. 15-20% discounts on NAV for the top CEFs in the industry. The market has already priced in a recession - 30% drop, can it fall further?...sure. Regardless it will be big gains tomorrow, followed by panic selling again no doubt. Im up 5-10% in the span of 20 mins...proof that reality has left perception of value.

Like 08, buy when others are panicking, bitching and whining. All over a sickness that kills the elderly and weak, much like the common flu. Cancer is Americas #1 enemy with no known cure (removal and remission only), but theres no panic because its the norm. Keep wiping your a$$es with all that toilet paper youre hoarding and start making a shopping list..
sts66 profile picture
Cancer isn't contagious, and neither is CVD. The flu kills ~ 0.1% of patients, CV-19 is 10x-30x that rate, no comparison.
Bought some PCI based on past article. I'm doing great on that one, having bought at near all-time highs....
PendragonY profile picture
Yes, it works out nicely to buy when others are selling in a panic.
I agree. It was an article written for all , not just subscribers. Easy to write an article when things are running smooth but it’s more difficult when folks need at least an explanation and a new outlook.
Time for the author to own up to his disastrous advice at exactly the wrong time as well as all the others who quickly jumped in “buying the dip” while prices are now 37% below when this article was penned on 3/10.
@Joesfk PCI may meet a need for some people (not me). And it has managed to generate a consistent yield over the years. But I think the author was wrong to describe this fund (along with PDI) as a "must own" and suitable "for volatile times." It's clearly neither.
He could probably fess up on PNNT also among others
What is the author’s current view of these recommendations given the collapse in the price?
$$$ and sense profile picture
The problem is with the market overall and the fear and hysteria that is driving it. Nothing is spared. If you are a retiree living off of 401k income or draws, this is especially frightful. You can hold but see your capital tank. You can sell but see your income stream dry up. The exasperating issue is as prices fall yields increase often to unsustainable levels. Guess what comes next ...distribution decreases; at least for some funds. No easy answers. You just have to know your own pain threshold and act accordingly.
GetRealHere profile picture
Pick up your PCI shares at a discount of 18%, PKO at a 21% discount or PDI at 13% (adjusted at close) today! Or wait for it to hit zero.....who knows what the end will be for a panicking herd of do-dos.
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