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Absurd, Outrageous, And Fully Covered: 8%-Plus Yields Are Available

Apr. 05, 2022 8:10 AM ETOXLC, PDI, PDO, PTY183 Comments


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This article was written by

Rida Morwa profile picture

I am a former Investment and Commercial Banker with over 35 years of experience in the field. I have been advising both individuals and institutional clients on high-yield investment strategies since 1991. I am the lead analyst at High Dividend Opportunities, the #1 service on Seeking Alpha for 6 years running.

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In addition to being a former Certified Public Accountant ("CPA") from the State of Arizona (License # 8693-E), I hold a BS Degree from Indiana University, Bloomington, and a Masters degree from Thunderbird School of Global Management (Arizona). I currently serve as a CEO of Aiko Capital Ltd, an investment research company incorporated in the UK. My Research and Articles have been featured on Forbes, Yahoo Finance, TheStreet, Investing.com, ETFdailynews, NASDAQ.Com, FXEmpire, and of course, on Seeking Alpha. Follow me on this page to get alerts whenever I publish new articles.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of PDO, OXLC, PDI, PTY either through stock ownership, options, or other derivatives. 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 (183)

houtex profile picture
Well those two didn’t work out over the ensuing 12 months.
Scoe profile picture
07 Apr. 2022
PTY and OXLC have pretty terrible risk adjusted returns. Both got annihilated in the pandemic. I have no idea what you like about this stuff.
houtex profile picture

For fun, I looked at the historical volatility of OXLC and checked to see how much leverage you would have to apply to VTI to achieve the same level of returns volatility. It’s 100%. So if you invested $10,000 in OXLC you are taking on the same level of returns volatility as buying $20,000 of VTI and borrowing $10,000! (And of course if you want to withdraw $1,000 a year, you can do that too, and you’d have about 6x more money by leveraging up VTI. Again, with the same amount of risk). All data calculated from OXLC’s inception.
PendragonY profile picture

Thanks for sharing and explaining that you didn't understand the article we wrote on why PTY and OXLC are good investments. We will have to do a better job of explaining ourselves in the future.

I am long both PTY and OXLC and both have done well for me. Part of that performance was driven by buying more shares when the price was low due to the COVID crash.
you know Rida I pledge to myself never to let you talk me into too risky of investments, I dont want CDO's but those Pimco funds are enticing.

Rida your a risky nut, but love your articles
PendragonY profile picture

We don't recommend any CDOs. CLOs are a very different investment.

I admit I dont understand the difference or how they work in general.
PendragonY profile picture

One of the main differences is that CDOs allow all kinds of debt into their pools, even tranches from other CDOs. CLOs are limited to secured first lien corporate loans.
CAVU Mark profile picture
I always look forward to Rida's alluring article titles.
@CAVU Mark

me too
Elk Tart profile picture
Making money off of loans is risky business, as we head into a recession. Many CEFs are overlevered. There's a reason those yields are so high.
ButscherDoug profile picture
@Elk Tart As long as the dividend rate is covered, I could care less what the dividend yield is.
PendragonY profile picture
@Elk Tart

PIMCO has quite a lot of experience making money off of loans and doing so in good times and in bad.

CLOs did quite well for those investors who didn't panic at the start of the GFC, so I think they will be fine this time too.
PendragonY profile picture

I want an attractive yield as well. But yes, covering the distribution is very important.
mysonchino profile picture
For all the doubters, shell game theory crowd etc. the total return on NAV for OXLC the past 3,5&10 years has been 14%+, 11%+ & 10%+. The market performance has been 8%+, 9%+ & 11%+. As long as NAV return is respectable the dividend is secure. It's the cash dividends that buy meat, potatoes and beer not the capital appreciation.
Ptstanford profile picture
@mysonchino Yes, if I'm not mistaken... the total return on NAV is a sure way to tell that the distribution is covered by income to the fund, and not a destructive Return of Capital.

So as a simple example if the Total Return on NAV for 3 years was 10% and the distribution was 10%... then the CEF is in good shape.

dont talk like that I will have to buy
06 Apr. 2022
I bought this after the crash of 2020 for $2.32 and have been reaping the dividend since then. Even with a reinvest I'm up 232%. A great buy I would say.
PendragonY profile picture

I didn't get quite that low of a price but did pick up some at during that period.
Rida just looks at yield, not capital appreciation or depreciation.
PendragonY profile picture
@Bobbie B

That isn't true. Yes, the distribution is our primary goal. But that isn't the only thing we look at.
SleepyInSeattle profile picture
@Bobbie B Unfortunately! An excellent way to erode capital and lose money.
After reading this article, I looked at a couple of my O’s, OXLC and O. I entered each position around the same time (about 2-1/2 years ago). OXLC share price is down 24% while paying me 10-12% annual dividend, so I am about even, or up slightly. On the other hand, O’s share price is up 24% while paying me 4-5% in annual dividends. Comparable risks?, probably not. I intend to continue to hold OXLC with the expectation that better days are ahead. However, right now they are not my favorite O.
Rida Morwa profile picture
@GreenguyMN I like O as well, its yield is below my target range but we also made moves around it in 2020 when the yield was elevated.
PendragonY profile picture

I own both O and OXLC. The risks aren't at all the same, and I didn't buy either in the hopes of selling it later for more money. I bought both for the cash flow.
Scoe profile picture
07 Apr. 2022
@GreenguyMN Both O and OXLC have high vol, poor risk adj returns, and massive drawdowns. Can't decide which is worse.
Color me confused.

Rida, wasn't OXLC your "pick of 2022"?

I dumpted it a couple of months ago at a significantly higher value than today's. This moment, it's at $7.11. If you don't mind my asking, what gives?
Rida Morwa profile picture
@MegaDivGuy OXLC is still one yes, we see it performing strongly in 2022, however it is prone to bouts of irrational movements so it offers more entry points.
Jetta2000 profile picture
@Rida Morwa I love this phrase:

".....however it is prone to bouts of irrational movements so it offers more entry points." LOL
@Jetta2000 in other words in goes on sale often. You can buy it on Rodeo drive or at a Compton yard sale
DRIP them.
Mortgage rates now over 5%,
both banks yielding over 6%.
Interest rates will rise this year.
No games.
PDO's started one year ago with a $20 NAV. It has dropped to about $18. That loss exceeds its dividend paid and in light of announced interest rate rises it seems that a discount is probably warranted (despite how tempting it may look in comparison to the other PIMCO funds). Just saying . . .
Rida Morwa profile picture
@Tradar7 PDO trades around bonds which have moved into the discount to PAR territory, so when they mature, PDO will get more than their current trading value. Its good to understand what a CEF holds to understand NAV movements.
@Rida Morwa Unless they paid more than par for some of them in which case those will mature to a lesser face value. Also, they may need to sell some to cover operating expenses which may cut short a recovery to par on those that fell below.
Time plot shows OXLC started at $20 then shortly sank to $15 for 5 yrs, then sank to $10 for 5 yrs and now rising from $5 to current $7! High yield but is it a shell game??? How much does one really gain??? Have to see year by year analysis starting at different dates 5 years apart. Also results if held in ROTH, IRA and non-IRA accounts? How dependent on your tax bracket? What tax surprises could come up?
LostinShalimar profile picture
Why is the immediate assumption that the sell-off is due to rising interest rates rather than the forecast for a recession? Wouldn't it be safe to say that a recession would likely impact cash flows more than rates? Or do you see them working as an inseparable pair?
Howard CostaRica profile picture
@LostinShalimar the mechanism the Fed employs is raising rates to tamp down inflation by inducing a recession, which by its nature with deminish aggregate demand thereby reducing inflation.

To me they are inseparable.
How about Höegh LNG Partners LP (HMLP-PA) 8,75% Cum Pref. at only USD 23,60?

9,3 % effective yield in todays most favorite market; LNG transport Carriers
racerkeith profile picture
@DutchGuy2 No K-1, and currently at a 5.6% discount to Call Value?
I'm in!
Littlebeef2 profile picture
@racerkeith careful. Parent has offered to purchase. I haven’t heard an update. Might be ok for Preferred but idk. Lack of transparency is an issue. I have both common and pfd. Thankfully not much
racerkeith profile picture
@Littlebeef2 Thanks. I'm focused on preferred shares.
Steven Bavaria profile picture
Rida -
Good article. OXLC is one of my major personal holdings and is in one of our Inside the Income Factory® model portfolios.
Rida Morwa profile picture
@Steven Bavaria Thank you for your kindness, always nice to see you when you swing by!
houtex profile picture
Just for fun, VTI has historically had twice the risk adjusted returns as OXLC and would give you ~50% more value even after withdrawing 11% (to mirror the yield on OXLC) since OXLC’s inception . Remember that if you are looking for something safe: a broad market stock fund has historically returned more, with less risk (lower draw down, lower stdev, etc.). Things may be different in the future, of course. https://tinyurl.com/y7hupnax
houtex profile picture
You say CEFs can borrow 33% of NAV. If you’re thinking of the regulations in the 40 act that is not true. The limit is debt over total assets, not net. Very different.
The CLO market is going to be a disaster. CLOs are almost entirely floating rate debt.
Rida Morwa profile picture
@vvvviking How will that be a disaster?
PendragonY profile picture

Why do you think floating rate debt is a problem in an environment of RISING interest rates?
@PendragonY Is that a rhetorical question? You realize you are taking credit risk here. Credit risk leveraged through a) a CLO structure, and then b) through a corporate structure.

What happens to the debt coverage ratios of these small and mid market companies when interest rates rise?

Also, the OXLC's of the world are not getting paid floating rate, they are getting the residual after all the senior bonds in a CLO are paid. The senior bonds in a CLO are floating rate also. So the equity does not necessarily benefit from rising rates. But the borrower has to pay it.

Have you ever read a pre-sale report for a CLO? You really should before promoting these companies. They are free on any rating agency website.
In all fairness OXLC was your pick of the year for the paid crowd. The yield is 12% but it has lost 12% YTD.
Rida Morwa profile picture
@DrPickles6000 Using SA's data, OXLCs YTD total return is 7.1%
@Rida Morwa it was 8.07 to start the year. It is decidedly not up YTD (that means year to date)
@Rida Morwa You should let SA know their data is wrong. OXLC--12/31/21 close $7.71. 4/5/22 close $7.14, a net loss of .57. Total distributions for 2022 equal .225. Net total return equals a negative .345 or a negative total return of 4.47% YTD.
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