When the markets are down, there is a group of investors who can ignore the downside because they don’t need to sell. You are undoubtedly part of this group — I am talking about income investors.
With dividends, of course, you can maintain your cash flow regardless of short-term panics over things like interest rate hikes and geopolitical unrest. Since the money is still flowing, you don’t need to sell during these times and can instead use your dividends to pay your bills, or maybe even buy the markets down, increasing your income stream. .
But where can you get a reliable income that won’t be affected by Fed moves and other events that are mostly beyond our control? Good news: some bond-focused closed-end funds (CEFs) can invest alongside the actions taken by the Fed to keep your earnings strong while protecting your investment.
One of the strategies used by these funds is to sell long-dated bonds and buy shorter-dated bonds instead. Since short-term bonds are less affected by rising rates, their price does not necessarily fall when the Fed raises rates, as long-term bonds typically do.
Of course, this is the most basic strategy, and pro CEF managers will do much more to maintain your dividend income and avoid losses triggered by Fed actions. They often use a combination of derivatives and private contracts with banks, for example, to help stabilize the value of their assets, as these tools give funds access to hedges which they can use to protect themselves from major market declines – hedges that are not available for the average. investor.
And that income can be huge: with returns above 10%, on average, the three CEFs I’m going to show you generate significant income streams for investors while aiming to limit volatility.
Each of these funds also has something in common: they are managed by PIMCO, one of the largest bond investment companies in the world, with a solid reputation on Wall Street and more than 2 trillion dollars under management. The company also has a strong performance record, as we can see in the returns generated by our top pick, the PIMCO Corporate & Income Opportunity Fund (PTY).
PTY has returned 781% since its inception, at the time of this writing, while crushing the stock market. This means that PTY investors don’t just outperform those who invest their savings in the stock market, they also get a huge return that few, if any, stocks can provide over the long term.
The funny thing is that with a 9.8% yield, the PTY is actually the least productive funds that I am going to show you today! This is partly because his strategy is relatively more conservative than my second choice, the PIMCO Dynamic Income Fund (PDI)which uses a combination of bonds and bond derivatives to generate an 11.7% revenue stream.
Are you concerned that these derivatives could harm PDI? Do not be. Not only did PDI survive the COVID-19 selloff in 2020, but it kept payouts steady throughout the crisis and, as you can see from the chart above, actually increased its dividend on the long term. A growing dividend of 11.7% shouldn’t be possible, but that’s what PDI has been offering for nearly a decade.
And that’s not all. See those spikes? These were special payouts at times when the market surprised with bigger gains, and it’s no surprise that they all happened in the early 2010s. mortgage bonds, which investors had foolishly considered too risky due to the subprime mortgage crisis of 2008/2009.
PIMCO’s leaders, always wise and contrarian, have taken an old Wall Street adage to heart: the next crisis will not be the same as the last. Avoiding recency bias, they bought excellent bonds at discounted prices and provided a huge stream of income to investors. They are also on course to achieve this feat this decade, as the fund positions itself through its derivative investments to profit of inflation, don’t be afraid of it like so many stock traders are.
Our latest fund is the PIMCO High Income Fund (PHK). As the name suggests, PHK focuses on high yield corporate bonds using PIMCO’s deep knowledge of the corporate landscape to buy bonds that are oversold due to unfounded fears.
I like to think of PHK as a high value game.
Over the past three years, PHK has recorded a modest profit on its net asset value (NAV, or the value of its bond holdings; shown in orange) and has again weathered the storm of COVID-19. The market failed to recognize this, however, pricing PHK’s stock (in purple) at a lower price than its portfolio increases.
This disconnect between market price and net asset value cannot last forever, which is why I see an opportunity to buy PHK shares at a low price to sell them back in the future when the market realizes its mistake. In the meantime, PHK will pay us its dividend (current annualized yield: 10%) monthly.
Michael Foster is the Principal Research Analyst for Opposite perspectives. For more revenue ideas, click here for our latest report »Indestructible income: 5 advantageous funds with safe dividends of 8.4%.”