Retirees Have A Better Option For High Yields (PCI, PDI)

These closed-end-funds offer value and yield for your nest egg

Looking at his brokerage statement, Ira’s heart sinks.

He once thought his savings were sufficient to last the rest of his life. But his retirement account balances have fallen to levels that make him nervous. He’s now thinking he may need to find part-time work.

Ira isn’t alone. Many retirees struggle to generate enough income to pay their bills.

The fault for this lies squarely with the Federal Reserve. Their zero interest-rate policy (ZIRP) has driven investors to lower yielding and higher risk investments.

You see, interest rates have declined for more than three decades. But in the last decade, they have been hammered.

The long-term average return on 10-Year Treasuries is 6%. That generates about $600 in annual interest income on a $10,000 investment. But with the 10-Year currently yielding just 1.7%, seniors with the same investment today earn a mere $170 a year.

That’s a 72% decline in income.

And it’s only going to get worse. The Fed is roughly 350 basis points behind their own schedule for where rates should be. It will take years to normalize rates from current levels, especially as rates in many places are negative.

These Policies Have Hurt Retirees

Former Atlanta Fed President William Ford says ZIRP has directed nearly $2 trillion away from savers since 2009. That redirection accounts for the money missing from Ira’s account.

Of course, this lack of yield has also forced investors to search for yields in nontraditional investments.  Many retirees now search for yields in dividend stocks and junk bonds as a desperate attempt to solve their dilemma.

This is just nuts…

Stocks, especially dividend stocks, are overvalued and subject to significant correction. This puts a retiree’s nest egg in jeopardy if the market corrects.

This Closed-End Fund Represents A Safer Choice

Yield isn’t hard to find if one is willing to look carefully. More importantly, we can do this while applying rigorous risk management techniques.

An example of an investment with high yield and solid risk management is PIMCO Dynamic Credit and Mortgage Income Fund (PCI).

PCI is a closed-end fund (CEF). A CEF is similar to a traditional mutual fund with a couple of key exceptions.

For one, CEFs issue shares only once. Once issued, they trade on the market just like any other stock. This differs from open-end funds. Open-end funds constantly create and redeem shares as investors move into and out of the fund.

But there’s something else…

Open-end funds trade at their net asset value (NAV).  Net asset value is the value of the fund’s assets minus any liabilities, divided by the number of outstanding shares.

But since CEFs are traded like stock, closed-end funds fluctuate above or below their net asset value, giving investors a chance to purchase shares at a discount to its NAV.

Such is the case with PCI.  The fund currently yields 9.8% based on its regular distributions and 10.95% when you include its year-end special distribution — something it has done since its inception.

As the chart below shows, PCI closed at $20.22 at the end of last Thursday’s trading. That represents a 7.16% discount to its current NAV of $21.78.

What does that mean for conservative investors?

Well, if PIMCO sold all of its assets in PCI today, its investors would make a 7.4% gain on the sale of the assets. That’s enough to mitigate the risk of a market correction.

In fact, it’s like buying the fund on sale. And in today’s environment especially, that’s a good thing.

Better yet, the fund’s monthly dividend distributions can be a godsend for retirees.

But Is PCI Safe?

Last July, the fund’s managers made strategic changes to give it more flexibility.  These changes were positive for the future of the fund.

One significant change was a move to mortgage-backed securities. They increased exposure to 62.28% in 2016 from 32.89% in 2015. At the same time, the company reduced its exposure to emerging markets.

However, the biggest change was in its management. The managers of PCI are the same people running the PIMCO Dynamic Income Fund (PDI). PDI has returned 42.25% since its inception in May 2012.

By all accounts, PCI is evolving into a bigger version of PDI.

Interestingly, PDI is currently trading at a 4.31% premium to its NAV.  Being a near identical twin to PDI, it’s not a stretch to assume that PCI’s price will quickly reverse its discount to match the premium of its sibling.

That alone makes PCI a buy right now.

Of course, for investors like Ira, twelve monthly checks don’t hurt either.

Risks to Consider: PCI is composed entirely of debt securities, making the fund’s performance highly susceptible to interest rate changes that may be looming at the end of the year. 

Action To Take: Buy in to PCI immediately before the price moves above $21. In addition, limit potential losses with a stop loss order at $16.50, the fund’s low for the year.

P.S. Investing in PCI isn’t the only way to pad your retirement income. One stock is beating the pants off of all others. And investors who grab even a small handful of these cash-payers can be set for life with a recurring stream of ever-increasing income. To discover the strategy that’s a must-have for a cushy retirement… Full story here.

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