PDI - PDI: 12.1% Yield Small Premium To NAV Highly Diversified

Summary

• PDI currently trades at a 9% premium to the fund’s net asset value.
• PDI offers strong monthly income with low net asset volatility.
• Short-term underperformance makes PDI’s 12.1% yield attractive.

PIMCO Dynamic Income Fund ( PDI ) is in a long-term downtrend, and the fund is now more appealing in terms of monthly distribution, yield, and valuation.

The premium to net asset value is moderate by historical standards, and PIMCO Dynamic Income Fund's assets are spread across a diverse range of high-yielding debt investments that should perform well in a downturn.

The monthly distribution, in my opinion, is what makes PIMCO Dynamic Income Fund so appealing to retirees who have a legitimate claim to stable and predictable fund income.

Inferior Short-Term Performance Equals Buying Opportunity

Not only have stocks and bonds been impacted by market volatility, but so have closed-end funds such as PIMCO Dynamic Income Fund, which began to underperform in 2022. The PDI's one-year return is -11%, which is lower than the fund's average annual return of 11% since inception.

In the past, the fund's negative performance has been attributed to tougher market conditions such as out-of-control inflation, which has pushed down valuations in the high-yield credit market.

Since PDI has outperformed in the long run, I believe the current period of weakness provides an opportunity to double down on the fund for long-term gain and income.

Diversification Is Getting More Important

The primary goal of PIMCO Dynamic Income Fund is to generate income from a portfolio of high-yield debt investments that includes corporate bonds, convertible bonds, municipal bonds, Fannie Mae and Freddie Mac securities, sovereign issues, non-agency mortgage-backed securities, asset-backed securities, derivatives, and even a small number of common stocks, preferred stocks, and REIT investments.

On PIMCO's website , an Excel file with an up-to-date breakdown of the fund's investments is available. Scroll to the bottom of the page and click on Holdings Report in the document section to see an asset-by-asset breakdown of the fund's current holdings.

While PIMCO Dynamic Income Fund is concentrated in fixed income investments, management covers a lot of real estate by spreading its investments across many different asset classes, which helps investors mitigate industry and country risks, as well as risks associated with economic contractions.

PIMCO Dynamic Income Fund's net assets were 4.6 billion as of July 31, 2022, with the majority of the fund's investments in mortgage assets, primarily non-agency mortgage-backed securities (30.2%) and high-yield credit (22.5%).

Some allocations have been made specifically to higher-risk companies, industries, and countries outside of the United States in order to improve the fund's diversification and income prospects.

Monthly Distribution: Too Attractive To Miss

The daily market price distribution rate, or yield, of PIMCO Dynamic Income Fund is 12.1%. In terms of composition, the fund's portfolio has seen only minor changes in recent months and will likely remain overweight in income-producing assets in the U.S. mortgage and high-yield credit markets.

PIMCO Dynamic Income Fund's yield outperforms most other debt yields on the market right now. In some cases, business development companies and real estate investment trusts offer high yields of around 10%, but these investments provide far less diversification than PIMCO Dynamic Income Fund.

PDI currently pays a monthly dividend of $0.220500, implying an annual dividend payout of $2.65. The effective dividend yield on net asset value for PDI is even higher, at 13.3%. The nice thing about PDI is that the fund pays its distributions on a monthly basis, which I really appreciate.

Net Asset Value And Premium To Net Asset Value

The net asset value of PIMCO Dynamic Income Fund was $19.94 as of August 30, 2022, and with shares of the closed-end fund trading at $21.82, the net asset value premium that is currently reflected in the market price is 9%. A closed-end fund's net asset value fluctuates on a daily basis, but the changes are typically minor, accounting for no more than a couple of cents per day.

In historical terms, the net asset value premium currently embedded in the fund's market price is not significant. In the fund's trading history, PIMCO Dynamic Income Fund has seen higher and lower net asset value premiums, and the gap between net asset value and market price has been much wider than it is now, particularly before Covid-19 and during the 2021 recovery.

Why PDI Could See A Lower Valuation

A credit market shutdown and recessionary fears would be a problem for PDI, affecting fund performance and likely resulting in a significant decline in the valuations of all current credit instruments in the closed-end fund's portfolio.

In the absence of a major market panic, and given the high degree of diversification within PIMCO Dynamic Income Fund, risks are, in my opinion, rather low.

My Conclusion

I'm increasing my PDI investment. Adding a monthly paying income fund with a 12.1% yield and multi-sector diversification trading at a 9% premium to net asset value is very appealing, especially as the market appears to be becoming choppier, which is why I like to diversify and add a few fixed income instruments to my portfolio.

Another reason I'm adding to PDI is that the fund has underperformed in the short term in comparison to its history, but I believe the closed-end fund's strong diversification profile and risk management make it appealing to income investors.

The net asset value premium of PIMCO Dynamic Income Fund is relatively small, and the fund's shares have previously traded at higher net asset value premiums.

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