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Nothing To Worry About With PIMCO Taxable CEFs

Jun. 10, 2020 7:00 AM ETPCQ, PDI, PGP, PHK, PML, PTY, PCN, RCS, PFL, PFN, PCM50 Comments


  • We think too much is being made of the lower coverage in the UNII report and that those ratios tend to ebb and flow over time.
  • We do not foresee a distribution cut to the non-agency MBS funds (PCI, PKO, PDI) and only low chances to other taxables. PHK and PGP are at higher risk of cuts.
  • For now, I'm in watching mode. Sort of like I was last month. The only changes I have made are to nibble at PKO and PDI with my distributions.
  • We would be trimming/selling PIMCO muni CEFs in favor of other holdings on our conviction lists. We can rebuy funds after they trim the distribution and investors sell off the shares.
  • In October 2019, PCI's coverage ratio was below 38%. Did the fund cut its distribution? No.
  • I do much more than just articles at Yield Hunting: Alt Inc Opps: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

(This report was issued to members of Yield Hunting on May 26th.)

Branding matters. Think of this. In the 1980s, PepsiCo (PEP) began running commercials with The Pepsi Challenge, where people would try two colas as a taste test and select which they liked better. Not surprisingly, Pepsi was the favorite choice. However, more surprisingly, Coca-Cola (KO) did the same taste trials and it found similar results - people preferred Pepsi.

Coca-Cola noted that this was due to their sweeter formula, which led them to creating one of the most dreadful of all marketing decisions ever, Coke II. The real interesting thing is that people tend to say they prefer Coke to Pepsi. That is borne out by market share, with Coke having a much larger market share than Pepsi.

The moral of the story is that people by product based on factors outside of taste. Relating to the closed-end fund ("CEF") world, people buy funds based somewhat on brand over "taste."

Enter PIMCO - the Mercedes, the NY Yankees, or the Coca-Cola of the bond world.

PIMCO funds are renowned income tools for individual investors. Today, they yield in excess of 11%, thanks to the much lower prices compared to three months ago. The distribution remains unchanged, giving your DRIP a bit of octane.

PIMCO recently released its monthly Earnings Report for April. The data wasn't all that positive but not overtly alarming either. No moves are necessary outside of small preferences on incremental buys. Coverage ratios, a la income production, was significantly below the distribution for the PIMCO Dynamic Credit Income Fund (PCI) and modestly so for the PIMCO Corporate&Income Strategy Fund (PCN), the PIMCO High Income Fund (PHK), the PIMCO Strategic Income Fund (RCS), the PIMCO Income Strategy Fund (PFL

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This article was written by

Alpha Gen Capital profile picture

Alpha Gen Capital is a former financial advisor and his analysis is meant to provide a relatively safer income stream with CEFs and mutual funds. He has been writing about investing on Seeking Alpha for the past decade and he aims to help investors better understand how to properly construct a portfolio.

Alpha Gen Capital leads the investing group Yield Hunting: Alt Inc Opps, where along with his team of analysts, he focuses on closed-end funds and getting yield from bonds to complement dividend portfolios. The service is dedicated to income investors who are searching for yield without the high risk of the equity market. Additionally, they provide 4 actively managed portfolios. Learn more.

Analyst’s Disclosure: I am/we are long PCI, PDI, PKO. 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 (50)

ParadiseFund profile picture
Thanks for your analysis! I am interested in making some purchase in PCI, PDI in the next weeks. In your opinion, would you buy both of them as twin or just owning one?
Thanks for your thoughts.
Pooh_Lover profile picture
@ParadiseFund Based purely off closing price on Friday and dividend yield PCI is the better play. There have been rumblings that PCI may cut their dividend. Nothing worse than buying a stock and having them immediately cut the dividend on you. That said, these types of Pimcos rarely cut but we're in rare times. I'm waiting til it has a distribution rate of 12% before I'm nibbling which could occur early in the week. I think the market may tank down to 2800 or so. If that happens PDI may get the green light. PDI pays a nice solid 22 cents a month but their special in December in some years has been quite special at well over a dollar several years and over $2 not including the 22 cents per month. I already own 5k PCI. 3k shares PDI so I'm looking to add more there although I'd gladly add more PCI if it falls more than the other one.
Pooh_Lover profile picture
Couple more days like today and I'm a big buyer PDI PCI PTY
Alpha Gen Capital profile picture
It doesn't look like we're going to get it.
allday1234 profile picture
I look at the futures today and say well that price won't go down any further and I want the stock so I put in a limit order for the past days closing price before the market opens. You just might get it from an after market sell order and if it rises and you want a good price be prepared ti bump it up a little after market opens to maybe still buy it at a good price.

Pooh_Lover profile picture
@Alpha Gen Capital Not today we didn't get it but a lot can happen between now and next week. I went in big with PDI 22 with PCI and PTY bought at the same time at whatever prices they were. For me personally, when these things hit 12% it's buy time. We almost got there with PCI. I don't have as much as @allday1234 with 5k PCI, 3k PDI and 4k PTY but I'm willing to double those if we tank again.
gimmeecoffee profile picture
Joined you on the PKO nibbling, got a starter slice at 21.81, a new PIMCO ticker to add to my PIMCO collection.
sts66 profile picture
You like catching falling knives, coffee? Market just dropped another 300 pts in a flash, PKO down to $21.51 now - and jesus h, PDI is getting the crap kicked out of it, down almost -10% - WTF?!?
gimmeecoffee profile picture
Hey STS. It was more of a forced buy to take some cash out of my account, as I have been plain old fooled the last few weeks with this crazy market and my option trades. I had a bunch of great PUT options that are now WAY in the money that I got out of yesterday after the FOMC had the market flying high, it just seemed that no matter what, the market was going up while the fundamentals just suck. After watching all my great option plays I was no longer in making loads of money, I opted to start buying some div stocks. When I say nibble, I mean nibble, very small starter amount, but I will keep adding as we drop. Now that the market looks like it wants to take a breather, my next add price will be at the gap at just under $20 on the charts. I bought a boatload of PIMCO funds a few months ago when market was in the toilet, even with the latest ugly drops, still nice, but yeah, damn, PDI is really taking a good spanking. Still got a small cash hoard as I was waiting for this damn drop to come, still thought we had through this week to be green, all my XLY and QQQ puts looking mighty good now, too bad I dumped them yesterday! *sigh*
sts66 profile picture
Hey, you made money on the puts, well done. I've been waiting for a 2nd market correction, think today's Fed news plus increasing infection rates in about 10 states so far may trigger it - LA County just went exponential again, think that's going to occur in many more states. On Friday my state is allowing indoor dining at 50% capacity, allowing gyms to reopen, plus more - it's IMPOSSIBLE to do social distancing in a gym's locker room, and sweat ruins N-95 masks as soon as they get wet - this is gonna get bad IMO. Might start looking at PKO under $18. Was thinking of adding PCI to my cash account, but waiting to see July div announcement first, think they might cut.
erniem profile picture
I sold my PCI, PDI, and PCN in the last month or two weeks.

I will not buy back PCI or PDI at current levels, did pick up some PCN today.
sc21 profile picture
thanks your moments-always learn something. sc
sts66 profile picture
Can't believe that as long as I've been following you here I don't recall you ever recommending PKO - man, wish I could have bought that in the March meltdown! CEFC shows most of their top 10 is interest rate swaps, approaching 50% of the portfolio - that's rather odd, isn't it? CEFC also shows them as 183% in bonds and -93% in "cash", which I assume are those swaps, but leverage is only 35% - which asset class is that money being used in?
Thanks as always for the update! I swapped from PCI to PDI as soon as I read about the UNII for PCI. Probably didn't need to do it, but it helped me sleep better at night.
We have a significant amount of profit in RCS, having bought at the bottom of the downdraft in early spring. Would it be advisable to swap the shares of RCS for shares of PKO? Thanks much, Nikki.
Graham Fisher profile picture
Speaking of 38% NII, where do you stand on GOF? They still haven’t cut after all these months.
@Alpha Gen Capital - Thanks for your continued excellent analysis of the Pimco funds. I am not a trader, but I consider your views when deciding where to put incremental investments. Of the Pimco funds, I have been a long-time holder of PTY, PFN and more recently PDI. Together, they make up 22% of my modest portfolio, which largely funds my retirement, going on 20 years now.
Made my initial foray into CEFdom last year with a purchase of PTY. Since then have been buying both PTY and PKO (more PKO). Promises to be a satisfying long-term relationship.

Thank you for helping to keep us flying right with PIMCO, Alpha Gen Capital.

Retired income investor
Thanks for the write up. I bought some pci when it was down but not at the lows. I was going to add more pci but if I understand correctly you would rather pdi>pci. Is that more because the distribution is safer and or because there is a chance it could get raised and or have better specials in December? Appreciate your thoughts.
Informative. Have PTY and am considered adding another PIMCO. This will help inform the decision. Thanks.
Good data and commentary,thanks.
@Alpha Gen Capital
Thanks for the insights - How do you feel about the high management fees/expense ratios of these funds?
Alpha Gen Capital profile picture
You have to pay up for that top brand. Expense ratios are actually not far out of line with most funds. Remember, interest expense is included in those ratios.
Excellent write up. I learn something new every time I read one of your articles.
@Saint Mark ..Ditto! Thanks Alpha..
scarp1952 profile picture
AG, great call on your predictions. Also a good look at municipal. I’m a long time holder of VKQ and BKN. I’ve found them both to be steady predictable performers.
Alpha Gen Capital profile picture
BKN is a top fund. I would have concern about VKQ due to the ROC in the distribution.
BKN vs BBN ??
wnd1 profile picture
Very helpful. Thank you.
allday1234 profile picture
Thank you for the PIMCO update. I only have 4 Pimco monthly pay investments and 1 quarterly NRGX which is down for me but have no plan currently to let go

I have PCI, PDI, PKO and PTY and have had them going on 5 years .I use to also have PCM and PCN, but decided 2 - 3 years ago to let them go
PCI is my largest holding at 7630 and PDI 3610, PKO 2950 and PTY 1740.

You misunderstand why the Pepsi challenge ultimately didn't predict Pepsi's winning its battle with Coke. It had nothing to do with brand preference or marketing. In fact it showed great marketing wasn't enough to make Pepsi #1. At first taste people prefer sweet. Over time, for the majority of people, overly sweet becomes sickly sweet and a little bitterness to offset the sweetness is more satisfying. It does show how companies knee-jerk reactions to what customers say they want can lead to disaster.
Alpha Gen Capital profile picture
I have read that as well. Thanks temp!
A more thoughtful test would have been to provide the focus groups a
case of both Coke and Coke II and contact them after they have
compared and contrasted for a period of time.
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