PIMCO High Income Fund: I Wouldn't Rely On It (NYSE:PHK) (2022)

PIMCO High Income Fund (NYSE:PHK) can look attractive for a yield-seeking investor. It’s got a high income focus, it pays out monthly, and it currently has a double-digit yield. Without more research, that already sounds like an excellent option. However, I don’t think the yield tells the whole story, and I wouldn’t rely on it. I did before and ended up making a sizeable loss on my holding.

Why PIMCO High Income Sounds Attractive

The fund objective is set out clearly on PIMCO’s website: it “seeks high current income, with capital appreciation as a secondary objective.” That sounds attractive.

However, it does raise some questions, which, in the case of PIMCO High Income Fund, I think, are particularly pertinent. First, how sustainable is it to seek high current income? Secondly, if capital appreciation is not achieved, what does that mean in practice?

The Problem with Chasing Yield

There is a problem with chasing yield that has been familiar to investors for centuries: it’s hard to find. If an investment was reliably paying out above-market returns on investment, investors would pile onto it. So, what’s a fund to do?

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One option is to chase yield in more exotic investment choices, but that increases risks. Another option is to keep a balanced portfolio in line with a more carefully managed approach to risk. However, that is susceptible to cyclical downswings in yields from certain asset classes. So, for example, as we have seen in recent years, when bond yields creep ever lower, it is hard to sustain a high yield. So, to keep in line with a certain risk profile, income is bound to fall, and at some point, distributions in the form of dividends will need to reflect that reality.

In the context of PIMCO High Income Fund, this is more than merely a theoretical point.

In June, it cut its monthly payout by 20%, from 6.1c to 4.8c a month. That followed a 24% cut in April last year, from 8.1c to 6.1c. Prior to that, in February 2017, it cut its monthly payout by 22%, from 10.3c to 8.1c. 10.3c was itself a 15% cut from the 12.2c, which had been paid monthly prior to a cut in August 2015.

So, in less than five years, a monthly payout of 12.2c shrank to 4.8c a month – a fall of three-fifths. Additionally, there has been a pattern of swingeing cuts. So, while it may be reassuring to believe that cuts are a one-off response to structural shifts in the bond market, for example, I don’t find it reassuring at all. The fund managers have cut the dividend repeatedly, so it is reasonable to expect that they should feel the need to so to do again in the future, they will, without compunction.

Chasing Yield Here Can Risk Capital

Imagine that, as a yield hunter, you were offered a savings account with a variable interest rate. While you might end up getting suboptimal yield, you could reassure yourself with the knowledge that at least your capital was safe. Clearly, in a fund like PIMCO High Income, that is not the case.

Look at the chart. The current price of $5.50 is a drop of roughly two-thirds from the $16.39 the shares hit in June 2007. At that price, the shares yielded 8.9%. Today, they yield 10.6%. It’s a high yield fund, so investors expect a high yield. As distributions are cut, the share price rebases to reflect that fact, and yield continues to look good. But the share price has broadly moved downhill for years, roughly in step with distribution cuts over the past five years.

PIMCO High Income Fund: I Wouldn't Rely On It (NYSE:PHK) (1)

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There have been exceptions, notably around the financial crisis when there was speculation that the distribution would be cut but wasn’t. It was during that time I got into the name, before later realising that I had made a mistake of judgment, since in the long-run, the distribution – which looks too good to be sustainable – was indeed too good to be sustainable.

The share price could recover in future. For example, if bond yields pick up, that could result in higher distributions and improved share price. Realistically, though, I do not assess that as probable.

Instead, over the long term, the shares have represented a significant erosion of capital. That is not the whole story, of course: along the way, there have been some good dividend payouts. But dividend cuts are a vicious circle: they lead to share price cuts to keep yield high, so investors both lose value in the shares and also receive a diminished monthly dividend payout with every cut.

Why I Wouldn’t Consider PIMCO High Income Again

Once burned, twice shy. PIMCO High Income’s track record is a lot less attractive now than it was many years ago when I bought into it. But, even then, I ought to have realised that, for a fund like this, past performance really isn’t a guide to future performance. If yields on the assets it can buy are falling and the fund is committed to monthly payouts using its income, dividends will need to catch up to that reality in the end. With a dividend cut, the share price will likely move down, to reflect investors chasing high yield bidding it at those levels, and also because, with each cut, the investment becomes seen as less and less reliable on the maintenance of payouts.

Whereas a company like AT&T (T) or Altria (MO) might be able to grow dividends but also grow its underlying business value at the same time, that’s not the same in a fund which holds bonds and similar assets for yield. The underlying assets are unlikely to appreciate dramatically in value themselves: it’s the yield that makes them attractive. So, if the fund income falls, there isn’t the same underlying foundation to support the share price that arguably exists at a T or an MO, albeit dividend picks like them are subject to market cycles of their own.

I don’t think one needs to dig into the specific current holdings of PIMCO High Income Fund or spend a long amount of time assessing whether the current share price reflects fairly the net asset value. Structurally, as I explained above, it’s hard to keep a fund paying out at those high yields over the long term while investing in bonds and bond-like assets. PIMCO High Income has proven that, with its series of dividend cuts in recent years. Anyone considering getting in now, attracted by the double-digit yield, needs to dwell on that as part of their decision process, I suggest.

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I am a private investor based in the United Kingdom and most interested in equities in the U.K., U.S., Canada and Norway.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

FAQs

Is Pimco High Income Fund a good investment?

PIMCO High Income Fund (NYSE:PHK) can look attractive for a yield-seeking investor. It's got a high income focus, it pays out monthly, and it currently has a double-digit yield. Without more research, that already sounds like an excellent option.

Is PHK a good fund?

PHK is a promising income fund from a respected manager that boasts a diversified high-yield portfolio. The portfolio does not appear to be very risky despite it containing junk bonds. The 8.46% yield appears to be sustainable, although its long-term track record is a bit discouraging.

Why is PHK dropping?

PHK has seen a sharp drop in 2020, markedly falling behind aggregate bond and equity funds. PIMCO announced another distribution cut back in June, which is a continuation of a trend that has plagued this fund.

Does PHK pay monthly dividends?

You must be a shareholder on or before the next ex-dividend date to receive the upcoming dividend. Track recent dividend declarations and get ready for upcoming payouts. Our picks from the +200 dividend stocks paying a monthly dividend.

Is Pimco safe?

This fund is as risky as many stock funds, but it returned a stock-like 9.5% annualized over the past three years through May 23. Pimco Diversified Income (PDVDX) is a multi-sector bond fund. It invests in global bonds as well as investment-grade and high-yielding "junk" corporate bonds.

What is Pimco High Yield Fund?

The PIMCO High Yield Fund focuses on the upper tier of the U.S. speculative-grade bond market. According to its literature, “The fund is actively managed to maximize total return potential while minimizing any increase in risk relative to the market benchmark.”

Does Pimco pay dividends?

Daily Accrual Dividends: Dividends are declared daily to that day's "settled" shareowners of record for the amount of net investment income earned that day. The payment of these dividends is on the last business day of the month. Record Date – Purchases through this day are eligible to receive the distribution.

What is High Income Fund?

The BlackRock Dynamic High Income Fund is a global multi-asset strategy that aims to provide investors with the potential for high income and positive total return. The Fund achieves this outcome by investing across stocks, bonds and “complementary income asset classes”.

Is PHK a closed end fund?

PIMCO High Income Fund - PHK - Closed-End Funds | PIMCO.

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