The newer generation of PIMCO closed-end funds (CEFs) have certainly had their share of winning streaks and setbacks. However, these unique strategies have generally added value and used their relatively high portfolio leverage productively.
We have advocated for these products virtually since their inception and subsequent IPO weakness due to their ability to significantly out-earn their stated distribution policies. This is largely the result of the shared manager of both funds; PIMCO CIO Dan Ivascyn, and his experience in the high income space stemming from the PIMCO Income Fund’s (PIMIX) very successful track record.
So it doesn’t come as a surprise that the board of the PIMCO Dynamic Income Fund (PDI) and the PIMCO Dynamic Credit Income Fund (PCI) announced dividend hikes of roughly 5% in their most recent monthly announcement. This is the second year in a row that PDI will get a dividend hike, while the underlying portfolio continues to rack up a large amount of undistributed net investment income (UNII).
Furthermore, both funds will likely also declare a significant year-end special dividend in the coming months to true up the underlying portfolio’s earnings and the fund’s YTD distributions to shareholders.
From a fundamental perspective, growing dividends play a large part in adding long term value for CEF investors. Although most investors would not view fixed-income CEFs as a dividend growth play, we’ve largely viewed the UNII trends of PDI and PCI to be indicative of future income hikes. This is important because it works to attract new investors into the funds shareholder base, which tends to work off large discounts quickly and efficiently.
In the case of PCI, I could even see the benefit of potential share buy backs to decrease the float and create more scarcity. Admittedly, the recent slouch in credit securities hasn’t been the most nurturing environment for these funds. However, I believe they will navigate future opportunities and risks well over the long-term. Both funds are considered core holdings within our Dynamic CEF Income portfolio as a result of their strong management prowess, positive fundamental backdrop, and underlying portfolio flexibility.
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