Let’s discuss an investor who banks a $34,533 dividend check on the first of every month. From one fund alone!
Think you can survive on $34,000 in passive income per month, too? From just one position?
Of course you do. And right now, you and I can buy this monthly payer for a better price than the big shot! (Who, by the way, keeps working long days—not what many of us would do with a $34K monthly paycheck!)
I’m talking about Emmanuel “Manny” Roman, the CEO of PIMCO. Yes, that PIMCO, the most famous bond shop in the world. It was the old home of Bond King Bill Gross, who has since been deposed.
Manny grew up in Paris, the son of two artists. He spent 18 years at Goldman Sachs. Now, he runs PIMCO.
In other words, a regular dude just like you and me, right? Ha! Yeah right, but here’s the thing. We can learn from Manny and lock in a better yield for ourselves than he did!
First, we learn. Then, we earn. Let’s look at Manny’s previous buys. In September 2022, the S&P 500 had its worst day since June 2020, in the thick of COVID. Manny’s fund was down 25% from its IPO. Most bond funds were getting waxed as the Fed jacked up interest rates and the bond market feared forever inflation.
PIMCO’s big boss bought the fear then and also the following spring. Regional banks like Silicon Valley Bank were going down—Manny bellied up to buy 100,000 more shares.
And he never sold. Neither has any other PIMCO insider: Not one has reported selling a PDO share in five and a half years of filings. It’s not that he won’t sell. Back in 2019 our hero unloaded 100,000 of another PIMCO fund, this one at a loss. Shot it down in cold blood.
Yet this fund, he’s put $4.3 million into! (I know, relatable, right? Ha.)
The fund is our own PIMCO Dynamic Income Opportunities Fund (PDO), which we bought in May 2023, a little after Manny, at a few dimes higher.
Manny’s average cost is $16.04 per share, giving him a 9.6% yield. But PDO, as I write, yields 12%, nearly three points above Manny’s dividend average!
The thing is, you and I can buy PDO just like a normal stock. It’s a closed-end fund, or CEF, which means it trades on the exchange. The keyword here is “closed,” which means it doesn’t create and redeem shares on demand like an ETF. So PDO can trade above or below what the bonds in its portfolio are actually worth (net of any debt). When it trades below that, you and I score a sweet deal because we secure more dividend for each dollar we invest—and snare a margin of safety to boot.
The fund has paid $0.1279 on the first of the month every month since July 2022. PDO usually trades at a premium because, hey, who doesn’t like a big yield? But it actually sits at a discount right now. Unusual.
PDO owns bonds that are spicier than your stodgy old pension fund can usually buy: mortgages, overseas bonds, and “junk-rated” company bonds. These tend to be below investment grade. Pension mandates usually bar them, so the value gets left on the table. We snatch it up!
How does the yield reach 12%? PDO borrows money, or in suit-speak, uses leverage to buy more bonds, borrowing 38 cents of every dollar it invests. Money costs about 5% today. Not exactly low cost, but it’s a winner for PDO because it buys bonds that yield more than 5%.
Now, why does PDO trade below what its bonds are worth, for 98 cents on the dollar? This dividend payer is a relative minnow at nearly $2 billion in assets, too small for the Wall Street whales to consume.
If you are Goldman Sachs and you’re looking to put your wealthy clients into it, you can’t just splash $50 million to $100 million in there, right? (About $8 million worth of PDO trades per day, so a $50 million order is a full week’s worth of volume! Too heavy for the market to absorb. It would push the price up and the yield down!)
But it’s plenty liquid for us—and Manny, who invested $4.3 million. We don’t move the price.
We can invest like Manny. You can put $10,000, $20,000, $50,000, or even $100,000 into this fund, no problem on the liquidity side. At the current 12% yield, every $100,000 invested mails you about $1,030 a month.
It’s worked out well for my Contrarian Income Report subscribers. We bought the fund in May 2023, after Manny’s most recent purchases. We’ve collected 40 dividend payments to date, $5.12 on our initial purchase of $13.13. That’s a sweet 39% of our money already back in cash.
The PDO “payout sausage factory,” though, is not for the faint of heart. Its income is lumpy, sometimes way over what it needs to pay us and sometimes below. For example, one-quarter of August’s check was investors’ own money handed back, called return of capital.
Coverage was ugly in January, when PDO earned only about 60% of its payout. Over the last three months it earned well above 100%. That’s what we care about. And you can be confident we watch Manny’s action closely for clues of any changes.
For now, the insider money says: “Buy!” His colleague Dan Ivascyn—Bond King Bill Gross’s successor—also has a big stake generating $31,975 in monthly divvies. That’s two huuuuge votes we’re happy to side with.
The fund now trades near fair value of its bond portfolio. Historically, it’s fetched a premium. Let’s take the cue from Roman and Ivascyn. After all, Manny’s check lands on the first of the month. So will yours, if you buy PDO.
Inefficient markets like the one we have in CEF land are key to retiring on monthly dividends, and PDO is not alone. I’ve got three other monthly dividend machines that average 11%. Click here to learn more about my favorite monthly payers.