Closed-end funds that pays out a reliable stream of income can help in the planning for retirement, explains Rida Morwa; in this special 5-part report, the editor High Dividend Opportunities highlights his favorite ideas for retirees and other income investors.
PIMCO Corporate & Income Opportunity Fund (PTY) is a CEF that focuses on fixed income investments and is managed by PIMCO, one of the top managers of fixed income investments.
The fund's portfolio is composed of a mixture of various debt investments with small amounts of preferred shares and common stock. Its debt investments include corporate bonds (nearly half the portfolio), senior floating rate loans, non-Agency MBS, and other asset-backed securities.
As is to be expected when interest rates are increasing, the NAV (and share price too) of PTY has been decreasing. Investors often have difficulty grasping that rising bond prices often work poorly for bond investors while falling bond prices often work better.
Investors are trained to automatically think that rising prices are better than falling prices. For a bond fund, this "common sense" is wrong. Paying more to replace maturing assets means less income for the fund. Falling prices mean that as bonds (and other debt) mature the fund can replace that income at a lower cost and thus generate more income. Income investors should hold CEFs to get the income stream.
This is exactly what has been happening with PTY. Back in January, PTY generated NII (Net Investment Income) for the month that exceeded the distribution it paid in January by just 3 cents per share.
In June (the latest month reported, the NII exceeded the distribution paid out by 7 cents. This increase in income was such that the distribution coverage for the previous 6 months went from 114% to 138%. So, despite being in a period that many think is bad for bonds, PTY increased the safety of its distribution.
This improved distribution coverage is good for several reasons. First, improved coverage makes the current distribution that much safer and given the uncertainty in the market, economy, and the world in general, more safety is always better.
Second, CEFs have a requirement to pay out most of their NII to shareholders. So with the YTD coverage ratio now at 130.5%, the chance that PTY will increase the distribution or pay out a special distribution has increased.
Finally, while we like PTY primarily as an income investment, over its existence it has proven to be a pretty good investment for total returns as well. Since its inception in December of 2002, PTY has had total returns with a CARG of 11.03%, that compares to SPY which has only had a CAGR of 9.93%. This is a very good long-term total return results for a fund that is currently yielding 11.4%.