10-19-2020, 03:46 PM
That is fine, as long as you are ok with the fact why we consider them to be too-good-to-be-true. Some risk is necessary, it's more about balancing the risk and reward.
I picked Pimco high income fund (PHK) randomly yesterday to take a look at since I didn't recognize most of the names. And the name is pretty nice and straight forward so I got interested. Also, I didn't want to look at the monster yield but something a bit more doable.
So, yield is 10%.
They deal in bonds. A quick look to their portfolio reveals that in their top 25 holdings there are only 2 bonds that themselves pay out more than 10%. The majority of the bonds yield somewhere around 6-7%... so how are they exactly taking a 2% management fee and still paying out 10% to investors? Yeah... strike one.
Their largest investment, with a 5% weight, is a 12% bond from Sequa Corporation. Opening their website: well for one, it looks like it was designed by a 15 year old at a highschool computer class somewhere in the 1990's. Secondly, last news on the company's official news feed? 2015. Yeah.
What do they do?
"Chromalloy, Sequa's largest business unit, provides the airline industry with a broad range of aftermarket services and ranks as the leading independent supplier of advanced repairs for jet engine parts"
Aircraft aftermarket would not be my first choice of industry for a high yield bond these days. Highest weight in a super dodgy looking company dealing in an industry that is currently being absolutely decimated? Strike two!
Dividend history?
They were essentially at $0.122/month for years, from 2003 to 2015. Then down to $0.103 in 2015, down to $0.081 in 2017, to $0.061 in 2019 and currently down to $0.048. In other words, in the past 5 years they have lowered their dividend payout ratio constantly, down 60% from where it was in 2015. You do not want to get dragged back to work when you're 70 because your income went down 60%, do you?
And it's still not low enough, so unless something changes another cut is coming. Strike three and out!
I picked Pimco high income fund (PHK) randomly yesterday to take a look at since I didn't recognize most of the names. And the name is pretty nice and straight forward so I got interested. Also, I didn't want to look at the monster yield but something a bit more doable.
So, yield is 10%.
They deal in bonds. A quick look to their portfolio reveals that in their top 25 holdings there are only 2 bonds that themselves pay out more than 10%. The majority of the bonds yield somewhere around 6-7%... so how are they exactly taking a 2% management fee and still paying out 10% to investors? Yeah... strike one.
Their largest investment, with a 5% weight, is a 12% bond from Sequa Corporation. Opening their website: well for one, it looks like it was designed by a 15 year old at a highschool computer class somewhere in the 1990's. Secondly, last news on the company's official news feed? 2015. Yeah.
What do they do?
"Chromalloy, Sequa's largest business unit, provides the airline industry with a broad range of aftermarket services and ranks as the leading independent supplier of advanced repairs for jet engine parts"
Aircraft aftermarket would not be my first choice of industry for a high yield bond these days. Highest weight in a super dodgy looking company dealing in an industry that is currently being absolutely decimated? Strike two!
Dividend history?
They were essentially at $0.122/month for years, from 2003 to 2015. Then down to $0.103 in 2015, down to $0.081 in 2017, to $0.061 in 2019 and currently down to $0.048. In other words, in the past 5 years they have lowered their dividend payout ratio constantly, down 60% from where it was in 2015. You do not want to get dragged back to work when you're 70 because your income went down 60%, do you?
And it's still not low enough, so unless something changes another cut is coming. Strike three and out!