PTY - PTY's Collapse Is Now A High-Yielding Opportunity Exceeding A 10.5% Yield From PIMCO

Summary

• Since its inception in March 2003, PTY has generated $37.94 of income through its dividends, which is significantly larger than the -12.33% share price decline since the IPO.
• PTY has recognized a sharp decline in share price, which has pushed its yield past 10% and is making this investment quite interesting.
• PTY has established a track record across almost two decades of generating monthly income throughout every economic environment without missing a beat.

There is certainly no shortage of yield in the market as U.S. 2-year treasury notes yield 4.26%, and a 1-year CD rate produces a 4.3% yield. Investors no longer need to incorporate an ounce of risk into their investment profile to generate modest income. Traditional Dividend Kings, such as The Coca-Cola Company ( KO ), are less attractive income options in a high-yield environment since KO produces a dividend yield of 2.87%. When the market was in a yield-starved environment, a 3% dividend looked incredible, considering at one point, it was more than double the year which could be generated from T-bills. There was a period in 2020 where the 10-year treasury note fell under a 1% yield, and in part of 2021, its yield was around 1.5%. Today, with the 1-year note at 4.69%, the 2-year at 4.2%, and the 10-year at 3.5%, taking on equity risk to generate an inferior yield to T-bills for income investors isn't as enticing as it once was. Investors are guaranteed preservation of capital and a yield that exceeds many Dividend Kings or Aristocrats through T-bills, making income investors look toward higher-yielding investments if they take on risk.

PIMCO is synonymous with fixed income and manages $1.69 trillion for central banks, sovereign wealth funds, pension funds, corporations, foundations, endowments, and individual investors globally. With helping clients meet their objectives for over 50 years, PIMCO has become a premier investment house, with 66% of its assets outperforming benchmarks over a 5-year period. As everyone is aware, 2022 was a destructive year for the markets, and many investors watched their portfolio balances decline.

The PIMCO Corporate & Income Opportunity Fund ( PTY ) fell to its lowest levels in a decade this past fall and has created an interesting high-yield opportunity. PTY has existed since March 2003 and has established a long-term track record of generating returns for its investors. After looking through the 256 consecutive months of income PTY has distributed to investors, it has been an income-producing machine now yielding over 10%. While PTY's chart in the short-term looks horrible, this is a battle-tested Closed-End Fund that didn't miss a distribution throughout the financial crisis, mortgage crisis, or the pandemic. For investors looking for a high-yield alternative to T-bills or CDs, PTY has fallen roughly -37% from its 2021 highs and could be establishing a bottom. I think PTY yielding over 10% is a high-yielding opportunity from one of the largest fixed-income establishments in the country.

How PTY operates and builds its portfolio to generate income and capital appreciation

PTY is a hybrid CEF as it aims to generate a maximum total return by creating current income that is distributed to investors and generating capital appreciation. To do this, PTY looks to invest 80% of its net assets plus borrowings in a combination of corporate debt obligations of varying maturities, other corporate income-producing securities, and income-producing securities of non-corporate issuers, such as U.S. Government securities, municipal securities, and mortgage-backed and other asset-backed securities issued on a public or private basis. Within PTY's rule set, it may invest a maximum of 25% of its total assets in non-U.S.-dollar-denominated securities and a maximum of 40% of its total assets in securities of issuers located in emerging market countries. PTY may invest up to 20% of its total assets in common stocks and other equity securities. PTY has a rule that it will not invest more than 20% of its total assets in debt instruments other than mortgage-related and other asset-backed securities that are rated CCC or lower by S&P and Fitch and Caa1 or lower by Moody's, or that are unrated but determined by PIMCO to be of comparable quality.

PTY utilizes leverage throughout its fund and has a total effective ratio of 38.52%. A breakdown of how its leverage is utilized can be seen below. PTY incorporates leverage through its outstanding auction rate preferred shares, reverse repurchase agreements and may also obtain additional leverage using dollar rolls or borrowings. PTY has the ability to enter into transactions using leverage that include selling credit default swaps, futures and forward contracts, total return swaps and other derivative transactions, loans of portfolio securities, short sales, and forward commitment transactions.

PTY uses a dynamic asset allocation strategy among multiple fixed-income sectors in the global credit markets. PIMCO employs an active approach to allocation among multiple fixed income sectors based on market conditions, valuation assessments, economic outlook, credit market trends, and other economic factors through its macroeconomic analysis as the basis for top-down investment decisions. PIMCO utilizes strategies that focus on credit quality analysis, duration management, and other risk management techniques to build a strong portfolio of assets for its investors.

Like any other investment, just because PIMCO has a comprehensive approach to selecting its investments for PTY, that doesn't mean it's a foolproof investment. PTY has had periods where it traded sideways, had swings to the upside, and had drastic declines leading PTY lower. PTY is coming off a steep decline since its high in 2021. PTY utilizes a substantial amount of leverage, which can intensify moves to the downside, so investors should conduct their own due diligence and decide if PTY meets their criteria for risk tolerance.

PTY's long history of generating income and returns for shareholders

PTY had an IPO market price of $15, a 4.68% premium to its initial net asset value ((NAV)) of $14.33. After almost two decades, PTY's share price has declined -12.33% while its NAV has fallen -21.98%. PTY's share price has had brief stints above the $20 mark, and during the financial crisis, spent roughly a year in single-digit territory. No matter what its share price has done, PTY has generated monthly income in the form of dividends, special cash dividends, and long-term and short-term capital gain distributions. Since March 2003, PTY has distributed $32.89 in dividends, $1.10 in special cash dividends, $3.11 of long-term capital gains, and $0.84 in short-term capital gains to its shareholders for a total of $37.94 of income. PIMCO has provided all of the data from its distributions, which I plotted on a chart below.

If you had been a shareholder of PTY since inception, your initial investment has declined by -12.33%. Hypothetically, if you purchased 100 shares of PTY for $1,500 when PTY hit the market in 2003, your initial investment would be $1,315 today, assuming the distributions were taken as cash. Since its inception, PTY has generated 253% of its initial IPO price from the $37.94 per share it's distributed through its monthly dividends. While PTY is down -12.33%, the total investment when dividends are included in the share price would be $51.09 as your asset of PTY is worth $13.15 per share, and it produced $37.94 in income. This would be an overall return of $36.09 or 240.6% over the past two decades, which is an annualized return of 12.03%. This doesn't consider the return if the distributable income was reinvested over the past two decades and the powers of compounding interest worked their magic.

Either way that I look at PTY, I see a strong long-term investment. While nobody likes to see a share price decline, you would have made more than double your initial investment through the $37.94 of dividends PTY has produced while still having your initial share base, producing future income. Today, shares of PTY are producing $1.43 per share in dividends, which are paid monthly through a $0.12 dividend. While PTY looks to have established a bottom, it could still have further to fall. PTY's track record for generating income is almost two decades in the making, and no matter what the economic environment entails, PTY has operated throughout every type of macro landscape that can be thrown at it, and the dividends are still flowing. From an income perspective, PTY is an interesting investment, and I think the current share price decline is an opportunity for income investors.

Since its inception, PTY has had a history of trading at significant premiums. Through some periods, this could this exceeded 50%. PTY has spent 764 days, trading at a premium to its NAV which was 25% or more, which is 14.61% of its time as a closed-end fund. When the markets turn and the Fed eventually pivots, PTY's NAV could spike, causing its share price to rise significantly. Compared to many periods in PTY's history, its NAV and share price are trading in a tight range, and there haven't been many periods where this was inversed.

Conclusion

I have been adding to my position in PTY for my Dividend Harvesting Portfolio series on Seeking Alpha (can be read here ), and I plan on starting a position in my main dividend account. I am looking at PTY as an income-producing investment that I will hold for the next several decades. If history repeats itself, I would be very happy with the prior two decades worth of returns, especially since I am reinvesting the distributions going forward. PTY has an established track record, and the consistent income is enough for me not to worry about share price fluctuations. Please do your due diligence as PTY may not be a suitable investment for your objectives; as for me, it fits well into my parameters.

For further details see: