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PDI: Despite The Drop, It Is Still Not Cheap

Mar. 10, 2020 3:48 PM ETPIMCO Dynamic Income Fund (PDI)94 Comments


  • PDI has gotten caught up in the recent sell-off. While this has presented more attractive entry points, the fund still has a sizable premium to NAV.
  • With mortgage refinancing at high levels, PDI is likely to see its income come under pressure sooner rather than later.
  • Given the 12% drop since my last review, downside seems relatively limited from here. Further, even with an income cut, PDI's yield should still be attractive as interest rates have declined.

Main Thesis

The purpose of this article is to evaluate the PIMCO Dynamic Income Fund (NYSE:PDI) as an investment option at its current market price. PDI is a fund I have liked for a long time, although I gave it a neutral outlook towards the end of last year. While I still found the underlying holdings attractive, PDI, like many PIMCO CEFs, began trading at a premium to NAV that I simply found difficult to recommend. While the fund continued to trade generally in-line with the market in the months that followed the review, it has come under heavy selling pressure as the risk-off trade has gained the upper hand.

Given the sell-off, across the market and in PDI, it may seem like a reasonable time to begin entering in to the fund. While I would not fault an investor for using this logic, and I do believe PDI will trend higher from here, I am still not optimistic enough to give it a higher rating. While the fund's drop offers investors a much better valuation than it did last quarter, the truth is the premium is still quite high. While PDI does have a history of trading at above-average premiums, that does increase the inherent risk of the fund. This reality may not be what investors are looking for right now, as volatility continues to rattle both equity and debt markets. Further, its sister fund, PIMCO Dynamic Credit Income Fund (PCI), still offers a much cheaper buy-in point. Finally, while I continue to recommend non-agency MBS exposure, there are risks on the horizon for this sector. Refinancing activity has picked up markedly as interest rates have dropped, and that reality is likely to pressure the income stream of PDI going forward.


First, a little about PDI. It is a closed-end

This article was written by

Dividend Seeker profile picture

I began my career in financial services in 2008, at the height of the market crash. This experience has shaped my investment strategy - which is focused on diversification, dividends, and growth opportunities. I am a competitive tennis player, and I competed at the Division I level in undergrad. I have a Bachelors and MBA in Finance.

(He is a contributing author for the investing group CEF/ETF Income Laboratory where he specializes in macro analysis. Features of CEF/ETF Income Laboratory include: managed income portfolios (targeting safe and reliable ~8% yields) making use of high-yield opportunities in the CEF and ETF fund space. These are geared toward both active and passive investors of all experience levels. The vast majority of holdings are also monthly-payers, for faster compounding and steady income streams. Other features include 24/7 chat, and trade alerts. Learn more.)

Analyst’s Disclosure: I am/we are long PCI, BKT. 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.

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Comments (94)

"You may not be interested in war but war is interested in you." Leon Trotsky
GetRealHere profile picture
Picked up some small positions in PDI at 18, PCI at 14 and NVG/PMX at 15-20% discounts. Theres recession pricing, then theres disconnect from reality pricing. You saw that today in credit/bond CEFs. Expect a big jump thurs, then the normal panic stupidity to follow after. Only buying on down days and typically the last hour.

These are the bargains of a decade happening at lighting speed, all over a severe cough/cold/wheezing spell.
GetRealHere profile picture
All the PIMCO CEFs are cratering today....unheard of discounts in all of them
Dividend Seeker profile picture
It was nice that we got some stabilization. This was an important lesson that leverage can really backfire
Dividend Seeker profile picture
The credit markets are telling us to be very worried...
TSampson profile picture
@Dividend Seeker @GetRealHere Do you folks know if they will have to deleverage their portfolio?
Dividend Seeker profile picture
I could not say for sure, but I would imagine that is a very real possibility. Great point to bring up.
TSampson profile picture
@Dividend Seeker On a more positive note, there were some recent insider buys http://www.insidercow.comhttp://www.insidercow.com/ Encouraging.
They may be able to get leverage thru their use of reverse repos as they don't use preferreds, but I have no definitive knowledge on this. I would be surprised if insiders were buying and they were going to deleverage. Also, last time this happened to funds in 2008(these were post crisis funds) they let the leverage coverage ratios slip a little as markets became irrational.
GetRealHere profile picture
So here we are, smack dab in the middle of world shutdown hell. PDI at a discount for the first time in a LONG while. Every bit of common sense says avoid right now, such a quandary! The world "ended" in 08 and I doubled my net worth...hoping "ended part 2" does the same.

Current shopping list (at some point as Im all cash currently)


Only the best, forget the rest. CEFs after major correction always represent the best bargains after.

Whos still buying here...anyone?
orangejay profile picture
Dividend Seeker profile picture
All the PIMCO funds seem reasonable now...The question is whether investors bid these funds up to the crazy premium levels we saw before
I've been nibbling at PDI. Sold it a while ago when the premium got too high for my taste.
Integrall profile picture
Made a buy today at 22.70..my first activity here in five years. Crazy markets!!
Dividend Seeker profile picture
It's been brutal, but also a good opportunity for those who can withstand more losses
Integrall profile picture
With no brokerage fees today it is easy to scale in small. Although PDI is below NAV, it's still hard to do. Hard to believe this best of breed fund is far from a bottom. Who knows in this environment..
sc21 profile picture
becomes more attractive with each quote. sc
@Dividend Seeker Thanks for the article. I'm finding it really hard to distinguish the difference between PDI and PCI apart from the premium aspect. All others seem to me to be virtually identical. Could you summarize the essential differences fro an in come seekers perspective to aid choice.
Dividend Seeker profile picture
There is not much difference. The objective, holdings, and fees are similar. The premium is determined by the market price, and I believe PDI has been around a little bit longer which may be a reason for investor willingness to pay up for it.
Integrall profile picture
PCI is the older and much larger fund. A few years ago PCI changed its mandate to become very similar PDI. As we PCI holders know, those changes have been successful.
Good article DS.
Dividend Seeker profile picture
I appreciate it, and thanks for adding that detail
Grand_Sport profile picture
PCI, PDI, PKO - you rarely get a chance to buy at a discount. Exciting times, but we have more people to infect, so waiting a bit. NZF and NVG on the radar as well. Going 100% cash at dow 29k has been glorious thus far, dumb luck maybe?.. or simple historic metrics coupled with a buying frenzy and market priced to perfection. Greed is a great barometer for when to sell.

If you decided to hold your investments and watch them crater 30% while still believing in buy/hold, maybe you should fast forward past the 90s ideals.
Dividend Seeker profile picture
Thanks for sharing that perspective
allday1234 profile picture
I would like to own some more PDI buy am still ready to grab untile the market settles . I use to own WPC and it was really a good stock for me only had 500 shares but finally harvested it. I see the market has driven it down about $20 from it's high with a generous dividend. Ex is 3-31 and $1.04 dividend may watch it a little and take another run at it .
I like to add PDI as well but for the money spent the dividend looks pretty good on WPC .
W.P. Carey: A Long History Of Class-Leading Triple-Net Performance. Somewhat reluctant to make any more investments until market settles down, just looking for ideas, but will put high on my list, as someday soon ( I hope) markets will return to normal.

Dividend Seeker profile picture
We all hope it gets back to normal soon...got to see some positive news out of the health care sector before it will
It's cheap now. Locked it in at 10.6% yield.
Dividend Seeker profile picture
Absolutely, at 10 am it was down around 15% and made a note of that to buy. Gotta move fast in this market!
$$$ and sense profile picture
The problem with CEFs and stocks as a whole is that Chicken Little is writing the game plan. If he says the sky is falling then the sky must be falling and we all run for cover. Hysteria sets in. Fear becomes the fuel and stocks/funds are just sold on a panic assembly line. One further problem with CEFs is as the price goes down the yields may become unsustainable. So a cut may be in the forecast which may generate even more downsize. But this is unavoidable. If you are an income investor then you are in the market and, if in the market, you/we will be victimized by these downdrafts. This free fall, though, is especially concerning. There is no end to the "negative" news and we all know what negative news does to the markets.
Dividend Seeker profile picture
I certainly would impact income cuts across the board, which is why I was very hesitant on high premium CEFs. As those premiums have shrunk, and moved to discounts on many of the funds I review, I view the impact of a distribution cut as minimal. As always, thanks for sharing your thoughts.
I can not believe I got into PTY, PDI, and PCI at $13.50, $24.1, and $20.00. Like shooting fish in the barrel. I sold 1/2021 $10 CXW Puts for $3.70. Book value is $11.50/share. Crazy times.
Dividend Seeker profile picture
Nicely done, today's opening prices for most of PIMCO's CEFs were unreal
allday1234 profile picture
If the markets continue to shake the world with bargain like projections and eventually settle down to normal as we run towards the end of the year the same people will be cussing out Pimco should they with respect to years past fail to pay the specials. That of course is the main reason to not count on a special.

Why not just buy NLY ? In same situation but much higher dividend and benefit from recent rate cut
Dividend Seeker profile picture
Certainly an option, although I would not consider it as a substitute for PDI.
allday1234 profile picture
Totally agree as I do not tell others how to invest. My opinion on a stock is mine and mine only , but to invest based upon yield /price/momentum or what ever is just personal preference. If you like NLY better....go for it.

Dividend Seeker profile picture
CNBC just reported refi's were almost 77% of mortgage applications last week
I bought some PDI about a month ago. By popular accounting methods, I am sitting on a "loss" of about 7%. However, I am looking forward to an income stream of about 8.44% on my original investment, and have no intention of selling my position to capture that "loss". All other things being equal, it would be nice to buy an income vehicle at a lower price, but you could go broke waiting for that lower price to materialize.
Dividend Seeker profile picture
Thanks for sharing that perspective
NV_GARY profile picture
WELLS FARGO has already completed 40% of last years total in mortgages. They are throttling back by upping their rates even as new lows were hit this week in the 10yr & 30 yr.
Dividend Seeker profile picture
Interesting, thanks for sharing that
Yep, I am experiencing this issues. The rates are actually higher then they should be.
Dividend Seeker profile picture
Still low enough to encourage refinancing?
Sierra backpacker profile picture
PDI made a large special distribution in December of $0.42! That is why the UNII had a large decrease between November and the January reports. That must be mentioned! Interestingly, now that I look at the two entries you show for presumably November and February (actually only January is released) your numbers are wrong, to the extent that your analysis/commentary doesn't make sense.

PDI 30-Jun-20 $1.33 $0.56 $0.220500 76.18% 118.69% 121.43%

PDI 30-Jun-20 $1.77 $0.22 $0.220500 115.37% 97.39% 118.05%
Dividend Seeker profile picture
Yes, the special is a primary reason for the large drop, but the important point is it leaves less room for error going forward. In any event, thank you for sharing that additional information
PDI is a buy and I’ve been adding to all my PIMCO funds.
Dividend Seeker profile picture
Excellent, I hope that works out well for you
@Dividend Seeker,

The UNII report you indicate is for PDI for February appears to be the December report per the Pimco website. I just checked their website and didn't see the February report available yet.

FYI, the last available report is for January and it shows significant improvement in the 3-month rolling coverage ratio for PDI since December.
Dividend Seeker profile picture
Thanks for catching that!
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