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DMO: A Look At What I Like And What I Don't


  • DMO is a leveraged CEF invested in mortgage backed securities, in both the residential and commercial sectors.
  • The fund has a slight discount to NAV and an attractive yield, so it does look tempting here.
  • The current yield will benefit from rising rates, especially as it limits refinancing activity.
  • However, a majority of DMO's holdings are below investment grade and/or non-rated. This makes it hard to identify the true credit risk of the fund.
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Main Thesis

The purpose of this article is to evaluate the Western Asset Mortgage Defined Opportunity Fund (NYSE:DMO) as an investment option at its current market price. This is a fund I have my eye on, and I may initiate a position in it in the near future. I like the residential and commercial MBS exposure, as I see a solid background for both those sectors. Property values are rising, in residential homes and commercial properties, save in the retail sector, and this is supporting underlying bond prices. Further, with a recent increase in yields, refinancing activity has been on the decline, which helps to support the current income production for the fund.

However, there are some downsides as well. Despite trading at a discount, DMO is slightly more expensive than its 1-year average. Further, the fund has seen a distribution cut recently, and 2021 section 19 notices indicate there could be another cut on the cards. While declining refinancing activity helps, that may not be enough to prevent another cut. Finally, while I find the fund's underlying sectors attractive, I do not like how the majority of the debt on the books is not rated. This makes judging credit quality difficult.


First, a little about DMO. It is a closed-end fund with a primary objective to provide "a leveraged portfolio, consisting primarily of non-agency residential mortgage-backed securities, commercial mortgage-backed securities, and mortgage whole loans." Currently, the fund trades at $14.64/share and pays a monthly distribution of $.1125/share, yielding 9.28% annually. This is my first review of DMO, and has come about as I am working on being creative with my new asset purchases in the new year. With valuations rising for the S&P 500, I continue to search for relative value, and have done so by branching into under-represented equity sectors, gold, Bitcoin, and managed duration bond funds. To diversify further, DMO has come on my radar screen, as

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This article was written by

Dividend Seeker profile picture

I've been in the Financial Services sector since 2008, which gives me an invaluable insight in how markets can turn. I currently work for a large-cap US Bank in funds management. I was a D1 athlete in college (men's tennis) when I got my Finance degree. I received my MBA in 2013 in North Carolina.

My readers/followers can trust that I won't pump any investment nor discuss a topic I don't genuinely follow and research. In that spirit, I list my portfolio here for transparency

Broad market: VOO; DIA, RSP

Utilities: VPU, BUI 

Energy: VDE, RYE, IXC

Innovation: GINN, QQQ


Dividends: DGRO; SDY, SCHD

Municipals/Debt Funds: BGT, Individual muni issues (NC)


Cash position: 25%

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in DMO over the next 72 hours. 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.

I am long BKT

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 (15)

Life On Mars profile picture
According to cefconnect, DMO is now paying it's distributions from 100% income.
Dividend Seeker profile picture
I would use Franklin Templeton's data over cefconnect
Life On Mars profile picture
@Dividend Seeker Could you please provide a link to Franklin Templeton's information about DMO? I could not find it.
Dividend Seeker profile picture
There are a few links in the article that are hopefully helpful
Income4ever aka Cyclenut profile picture
Former DMO holder, way too many distribution cuts for me , sold off last March in the middle of the cliff dive and swapped into other opportunities..
Long time holder of PCI, PDI and PTY who operate in the same spaces with no cuts
happy investing
Dividend Seeker profile picture
Thanks for sharing your perspective, best of luck with those investments
Very good details-they actually have cut distribution many times in last few years but they often pay year end large payouts-stock was $22 in late 2019-
13 F filings for 12/21/20 quarter
8 new positions-up 33%
19 increase positions-up46%
4 closed positions-up 33%(but small number)
14 reduced-down 17%
Dividend Seeker profile picture
I'm glad you found it helpful, thanks for adding that additional data
sc21 profile picture
@Dividend Seeker
thanks a clear piece. The very high percent of unrated is a problem. Do you have any data on past default rates that might allow you to project how this might pay out.? Also have been looking for a second fund mainly holding agency paper like BKT but have not seen anything interesting. Can you suggest anything to look at ? While sticking to agency paper may generate lower yields, it should be more stable. tia sc
Dividend Seeker profile picture
I'm glad you liked it. BKT is a bit unique in its focus, I have not found a good peer for it, which is why I continue to hold despite the discount evaporating. Aside from the passive MBS ETFs, the only one that comes to mind is RCS, which changed its portfolio quite a bit to hold over 50% of agency MBS. It's not the right option for me, but worth a look.

In terms of defaults, I'd have to do some research on that for MBS. I know for munis, non-rated bonds make up a good chunk of defaults. I would have to imagine a similar story would play out for commercial MBS, but I don't have any data on it at the moment.
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