There are different methodologies to investing, and while some gravitate toward plowing their capital into index funds, others may become intrigued with disruptive growth companies. Often investors will figure out an investment mix that is curtailed to their objectives, and investors rarely take identical paths. I know a lot of people who have formulated an investment strategy and while there are many overlapping characteristics, there are certainly differences. Some investors will say that their primary focus is to reach a specific account value. Others will say they invest in the markets because interest rates in savings accounts or CDs generate low returns. Others would articulate that they are trying to generate passive income through income-producing investments. Suppose you lean toward a primary focus of maximizing your account value over an extended period. In that case, S&P index funds or big tech investments that have outpaced index funds over the past decade will probably appeal to your investment style. If you're an income investor that is starving for yield, then the PIMCO Dynamic Income Fund (NYSE:PDI) is an interesting choice.
I am a hybrid investor, and I allocate my capital to index funds, individual equities that I believe will beat the market, selective growth companies that I believe can become industry disruptors, and income investments. I have an income section of my portfolio where I am growing my stream of passive income and reinvesting each dividend and distribution. By the time I retire, I plan to utilize the stream of income I have built to offset my income loss. Whether you're building a stream of passive income for the future or looking for income investments to live off of, PDI has generated a 10.53% yield and paid its distribution on a monthly basis since its inception in 2012. Over the years, PDI has traded sideways, and you're not going to see 100% or 200% returns in its market price. On 5/30/2012, PDI traded at $25.30, and almost a decade later, it trades at $24.85. PDI won't be on the radar for investors seeking growth or capital appreciation, but it should be for income investors. PDI has traded sideways and generated a large distribution for almost a decade providing downside risk mitigation with large yields over the past decade. I have added PDI to my Dividend Harvesting Series on Seeking Alpha as it fits my criteria for an income investment.
My criteria for an income investment
When I research individual equities or a fund for an income investment, I am primarily looking for a vehicle that will mitigate my downside while generating consistent income. On this portfolio, capital appreciation plays second fiddle to income generation. Suppose I am looking at an individual company. In that case, I am looking at their dividend yield, payout ratio, years of continuous dividend increases, revenue growth, net income growth, and free cash flow (FCF) growth. When I look at a fund, I look at its investment strategy, holdings, dividend history, how many dividend increases they have provided, and how the price trades to its NAV.
I am less concerned with capital appreciation and more concerned with growing my income stream. Within my income investment thesis, I plan to reinvest each dividend and allow the powers of compounding to work in my favor. For instance, PDI pays $2.65 per share and yields 10.53%. If I purchased 100 shares of PDI for $2,497, it would generate $265 in income annually. By reinvesting each distribution, my forward income increases each month. As long as my initial capital trades sideways, I am perfectly happy locking it up to generate large yields.
PDI has been a tremendous income investment over the years.
If you go to PIMCO's website for PDI and click on historical prices and distributions, you can see every distribution PDI has delivered to its investors. Since its inception in 2012, investors have received income every month. PDI has paid its normal dividend distributions, special cash dividend distributions, long-term capital gains distributions, and short-term capital gains distributions. You can export the file into Excel and also do some calculations.
PDI started paying its distributions in August of 2012. If you had purchased shares when PDI was created around the $25 mark, each share would have generated $33.11 in income over the past 9 ½ years. The regular distributions would have generated $24.12, then you would have been paid $7.62 in special distributions, $0.90 in long-term capital gains, and $0.46 in short-term capital gains. If you had purchased 100 shares in 2012 for $2,500, your investment would have generated $3,311 in income over the years, and today your initial investment would be worth $2,497, assuming you were taking the distributions as income. You would have generated 132.44% of your initial investment in income while still having 99.88% of your original investment, which would still be generating at 10% plus yield.
PDI has paid 122 monthly distributions since its inception. I am utilizing a dividend reinvestment calculator to make some assumptions, so I don't have to do the legwork by correlating each of PDI's previous distributions to its share price on that date and reinvesting them. According to this dividend calculator and using PDI with a stagnant share price, 0 distribution increases, 100 shares on an initial investment, and a holding period of 9.5 years, the ending balance would be $7,077.55 if you were to reinvest each distribution. Take this with a grain of salt because I made some assumptions. If these assumptions were accurate, your 100 shares would grow into 255.95 shares and generate $701.79 in annual income. This would be a 184.12% total return with an annual average of 19.38%. The initial investment would have generated $4,586.55 in distributions.
PDI has almost a decades worth of data, and it has traded in a sideways range and paid 122 distributions. There are currently $5.25 billion in assets under management, and PIMCO is a credible investment firm. Over the years, investors have received 3 distribution increases, and during the pandemic, the distribution wasn't cut or reduced. Based on PDI's previous history, it's an interesting income investment regardless of whether you're taking the income now or reinvesting it to grow your future income stream. My time horizon is 30 years until I retire, so I changed my assumptions out of curiosity in the dividend calculator. If I use 30 years as my holding period with the same assumptions of a stagnant share price and reinvesting the distributions, my ending balance would be $57,134.84 from a $2,497 investment today. The initial 100 shares would grow to 2,066.22, and they would generate $5,665.32 in annual dividend income. Nobody can predict the future, but if PDI fluctuates and its past history of distributions holds true, every 100 shares are bound to generate significantly more income decades into the future if you reinvest the distributions.
An overview of PDI's fund
PDI is a closed-end fund with an active approach, allocating its capital across multiple fixed income sectors. PDI's focus is on seeking income-generating investment ideas across multiple fixed-income sectors, with an emphasis on seeking opportunities in developed and emerging global credit markets. PDI will normally invest at least 25% of its total assets in privately-issued mortgage-related securities. PDI will also invest up to 40% of its total assets in securities of issuers economically tied to emerging market countries. PDI's investment objective is to maintain an average portfolio duration of between zero and eight years. PIMCO selects particular investments for the Fund by employing a bottom-up, disciplined credit approach that is driven by fundamental, independent research within each sector and asset class. There is a primary focus on identifying securities and other instruments with solid and/or improving fundamentals. When selecting each investment, PIMCO's team utilizes credit quality analysis, duration management, and other risk management techniques.
PDI invests in worldwide debt obligations and other income-producing securities with varying maturities and related derivative instruments. PDI's debt obligations and income-producing securities portfolio includes investments in U.S Government, mortgage, high-yield credit, non-USD developed, emerging markets, investment-grade credit, and municipal. Its top 5 industries are Aerospace & Defense, Wirelines, technology, banks, and electric utilities.
Recently two of PIMCO's other funds, the PIMCO Dynamic Credit & Mortgage Income Fund (PCI) and PIMCO Income Opportunity Fund (PKO) we reorganized into PDI on Friday 12/10/21. PDI acquired all of the assets and assumed all of the liabilities of each of PCI and PKO in exchange for newly-issued common shares of PDI. The exchange was based on the net asset value per common share of PCI and PKO.
Today shares of PDI are trading for $24.97, which is a 4.78% premium to its NAV of $23.83. While PDI has declined by -6.58% over the past year and is down -3.01% in 2022, it has a historical average of generating 12%+ returns since its inception in 2012. PDI has an expense ratio of 2.78%, while its distribution rate exceeds 10.5%. PDI is incredibly diversified across 2,162 fixed income and multi-sector investments. Since 2016 PDI has traded at a premium to its NAV even during the COVID crash.
Conclusion
I am a buyer of PDI for the diversification it offers into investments I wouldn't make or have access to and the large amounts of yield it generates. After the reorganization, PDI has become one of the largest fixed-income CEFs. Its objective of generating income aligns with my investment objective to create consistent cash flow within my portfolio. When looking at income investments, it's hard to argue with PDI's distribution history as each share since its inception at $25.30 has generated $33.11 in income over the past 9 years. PDI's past history checks off my boxes in an income investment. I have gone into this investment with the expectation of PDI trading sideways and generating 8-11% yields based on share fluctuation. With a track record of 122 previous monthly distributions, I plan to compound my way into a lucrative future cash flow stream.
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