The PIMCO closed-end funds are well-regarded in the market for their solid management and attractive distribution rates. A particularly attractive feature of PCI (as well as PDI) is the special dividend that is typically a multiple of the regular distribution.

We decided to have a look at the PCI financials to see what amount of Net Interest Income the fund is able to generate and how that stacks up against the total (regular plus special) distributions it has paid out in the past. We expected the NII to be in line with the total distribution from NII in the belief that PCI typically overearns its regular distribution and the left over cash goes to pay for the special dividend at year end.

What we found was very different – it turns out PCI has always underearned its total distribution. The obvious question is if this is the case where does the special dividend come from? We see the following alternatives:

  • ROC: funds often return capital to investors (in various constructive and destructive ways). However PCI (if one believes CEFConnect) has not returned capital to its investors.
  • Capital gains: if a fund has a capital gain, it can choose to pay out this gain to investors (as short-term or long-term capital gains). Apart from a single tiny payment, PCI has not done this. Moreover, the net realized and unrealized gains since 2013 for the fund are negative.
  • UNII: funds can return accumulated UNII to investors. In the case of PCI the fund typically returns all of the accumulated UNII to its investors at the end of the year.

So, what we have is a puzzle (at least for us). This doesn’t mean that PCI is in danger of cutting its dividend as the regular distribution remains well-covered however it creates some uncertainty on the sustainability of the special dividend.

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