NHS - DMO: Don't Be Fooled By The High Yield
2025-05-30 10:14:33 ET
Summary
- DMO offers a compelling 13.45% yield, far outpacing major bond indices, and most peers, but primarily invests in lower-quality, below-investment-grade mortgages.
- The fund's high leverage amplifies both returns and volatility; while total returns outperformed indices, net asset value, and share price have declined over time.
- Commercial mortgages remain troubled, and this could weigh on the fund's net asset value for the next few years.
- DMO consistently fails to cover its distribution from net investment income, eroding NAV and raising the likelihood of a future distribution cut.
- Currently trading at a modest discount, DMO appears expensive relative to its history and risks; I recommend waiting for a larger discount before considering a purchase.
The Western Asset Mortgage Opportunity Fund Inc ( DMO ) is a closed-end fund that allows investors to earn an attractive level of income by investing in mortgage-backed securities. The fund does quite well in this respect, as its current 13.45% yield is substantially higher than any of the major domestic fixed-income indices. We can see that here:
Index/ETF |
Current Yield |
iShares Core U.S. Aggregate Bond ETF ( AGG ) |
3.83% |
SPDR® Bloomberg High Yield Bond ETF ( JNK ) |
6.63% |
iShares MBS ETF ( MBB ) |
4.10% |