This 14.4% Dividend Yield Offers a Wise Counterintuitive Selection for 2025
2024 is almost upon us, leaving us with just a few hours before departure, and here's the current scenario:
The Federal Reserve reduced interest rates for the third time in a row during their meeting on December 18. Interestingly, however, the yield on the 10-year Treasury is now higher than when the easing cycle began.
Hold up. What?
The bond market has been clear in its message to Jay Powell: the job on inflation is far from over. This makes sense; the economy is strong, there are plenty of job opportunities, and the market has no shortage of liquidity.
Slowly but surely, Powell is beginning to comprehend this. And here's the turn of events: The hawkish stance he took on interest rates during the December 18 meeting—which included the Fed's prediction of two rate cuts in 2024 instead of four—could potentially lead to a peak in the 10-year Treasury yield.
We got a glimpse of this on December 20 when the personal consumption expenditures price index (PCE) dropped. This index, which is the Fed's preferred measure of inflation, came in lower than expected, causing the 10-year Treasury rate to decrease slightly.
This simply confirms what I've been saying since the election: everyone is anticipating Trump 2.0 to result in higher interest rates. As contrarians, we know that when everyone anticipates something, something else usually happens.
"High Rates Forever" Story Offers Opportunities for Contrarians
To be clear, I'm not suggesting that rates will suddenly plummet. Nor am I changing my prediction of a "no-landing" economy. But I do believe that the "high rates under Trump" narrative is being overstated.
This opens up possibilities for bonds (and bond proxies) as more investors come to this realization. However, we're definitely not investing in Treasuries or investment-grade paper here. The yields are still too low, and Treasuries require us to tie up our money for a decade.
Instead, we're focusing primarily on the high-yield section, where the best deals (and dividends!) are hiding. And the best way to do this is through a high-yield closed-end fund (CEF), such as the PIMCO Dynamic Income Fund (PDI).
A 14.4% Dividend with a "Secret" Discount
The simple truth in bond-land is that when 10-year Treasury rates are rising, bond prices are falling. If Powell's "adult-in-the-room" stance brings about the top I believe it will, investing in a bond CEF like PDI at this time is a smart move.
The fund is managed by PIMCO, specifically Daniel J. Ivascyn. If you've been reading my articles for a while, you know I'm a big fan of PIMCO. And Ivascyn, who has deep connections in the bond world and is renowned in the industry, is so respected that he's simply known as "the Beast."
It's easy to see why: PDI (in purple below) has delivered a 110% total return in the last 10 years, more than doubling the go-to corporate-bond ETF (in orange), thanks to Ivascyn's skills and extensive network, which keeps him informed about the best new issues.
Now if you've looked up PDI on a screener like CEF Connect, you might be wondering why I'm recommending PDI, considering that it trades at a premium to net asset value (NAV) of 8% at the moment.
It's a valid question. After all, we're paying $1.08 for every dollar of assets here. But here's the thing: PIMCO is a respected name in CEFs, and its funds often trade at premiums, sometimes double-digit ones.
So, even with a premium of 8%, PDI is still a bargain in disguise, especially when its current premium is lower than its five-year average of 9.1% and has been as high as 21% in recent years.
That's why I continue to rate PDI as a buy in my Contrarian Income Report advisory.
Brett Owens is the Chief Investment Strategist for Contrarian Outlook. For more fantastic income ideas, get your free copy of his latest special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
In this economic scenario, investors may be looking beyond traditional Treasury bonds due to low yields, instead considering high-yield funds like the PIMCO Dynamic Income Fund (PDI). Interestingly, the Federal Reserve's prediction of a potential peak in the 10-year Treasury yield, following their hawkish stance on interest rates, could benefit such funds.
Given the current situation, where the 10-year Treasury yields are influencing bond prices, investing in high-yield closed-end funds (CEFs) like PDI, managed by renowned expert Daniel J. Ivascyn, might offer attractive returns, despite its current premium to net asset value (NAV) of 8%.
