A Paycheck from PIMCO

09/22/2014 9:00 am EST

Focus: FUNDS

Robert Carlson

Editor, Retirement Watch

My "Retirement Paycheck" portfolio is designed for income seekers; we strive to earn an above-average yield (recently around 6%), while maintaining a margin of safety, explains Bob Carlson, editor of Retirement Watch.

We also want to earn some capital gains over time to maintain purchasing power. I am adding a new closed-end fund to this portfolio, PIMCO Income Strategy (PFL).

Unlike most of the PIMCO closed-end funds, this one sells at a small discount to net asset value. It used about 21% leverage and has a recent yield of 9.05%. The fund is up 12.44% for 2014 to date.

This fund has wide latitude to invest in almost any sector to generate a steady stream of income.

Recently, it was in non-agency mortgages, taxable municipal bonds, investment-grade corporate bonds, US government bonds, and non-US debt.

Manager Bill Gross is not afraid to make frequent and substantial changes in the portfolio as opportunities and values change. For example, in early 2013 the fund was about 16% in high-yield bonds and those now are almost gone.

In mid-2013 the fund quickly built up an emerging market bonds position after a sell-off in that sector but almost eliminated it by the end of the year.

While the fund has a high yield, the distributions almost always are covered by income earned by the fund. Unlike many closed-end funds with high yields, the fund rarely has to distribute principal to maintain its payout.

The fund will be volatile, but investors should overlook the short-term volatility and focus on its yield and long-term returns.

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