Income investors love "special" dividends. I can't blame them. You buy a company for the income, and then at the end of the year, you get an oversized payout, observes Rida Morwa, editor of High Dividend Opportunities.
The problem is that typically share prices increase after a special dividend is declared. Buyers will come in and bid up the price. If you wait until a special dividend is declared, you are likely too late to benefit from it. I can't guarantee a special dividend, but we can look at the numbers and make an educated guess.
PIMCO Dynamic Income Opportunities Fund (PDO) is a prime candidate for a special dividend. Why?
1) PIMCO has a history of issuing special dividends for funds when net investment income significantly exceeds the dividend.
2) PDO had a special dividend last year, suggesting that PIMCO is following its historical strategy with PDO.
3) PDO has substantial UNII (undistributed net investment income) and continues to cover its dividend by a significant amount.
4) Our outlook is that PDO's NII is likely to continue rising.
PIMCO's UNII report shows that PDO is ahead of its peers with a UNII of $1.05. Meanwhile, PDO has had 163% coverage in the past three months. PDO's dividend coverage and excess UNII are a byproduct of its shorter duration and a significant amount of near-term maturities.
PDO has a duration of approximately 3.27 years, and with 1/3rd of its portfolio maturing within the next year, it will have significant capital to reinvest at higher interest rates.
Like several of PIMCO's funds, PDO has a diverse array of investments with concentrations in non-agency mortgages and high-yield corporate credit. One area that is new to PDO is a significant increase in Commercial Mortgage Backed Securities. They now make up nearly 18% of PDO's portfolio.
PIMCO made its reputation by stepping in and buying residential mortgages at the height of the foreclosure crisis. They recognized the great opportunity when others were running in fear. PIMCO is once again there, buying up assets at discounted prices. With significant maturities over the next year, PDO is well-positioned to have ample capital available to invest in opportunities as they arise.
We are happy to add shares of PDO, collecting a generous yield immediately, having a great chance of a special dividend in December, and benefiting over the long run from PIMCO's superior management as they identify new opportunities in tumultuous bond markets.