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What to Make of Pimco Income's Return of Capital

A small portion of the fund's March dividend payments will be classified as return of capital rather than regular income.

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PIMCO Income A

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This article was updated on April 13 to incorporate additional information. A version was published on April 1, 2020.

Pimco filed a Section 19(a) notice with the SEC on March 30, 2020, notifying shareholders of Pimco Income PIMIX that a very small portion of their March 2020 dividend payment constituted a return of capital. That meant a 1.33% reclassification of the March payout as capital.

Once the norm rather than the exception it is today, Pimco Income looks to provide a predictable, steady level of monthly income by targeting a fixed payout and making sure the fund brings in enough interest income to easily meet it. (Most funds don't target fixed dividend payouts anymore.) Historically, Pimco has managed to do that without any trouble. But a sharp drop in yields among several bond market sectors over the past year, coupled with valuation-driven management decisions to trim exposure to risk assets going into 2020, meant a bit less income than usual flowing through the portfolio in March.

Pimco made the aforementioned 19(a) filing in recognition of that circumstance. In effect, though, it was a point-in-time accounting observation, reflecting a very slight portfolio-income to dividend-payment mismatch for a single month. So slight, in fact, that 1.33% of a roughly $0.05 per-share monthly dividend is essentially a rounding error.

Were the portfolio to produce less income than necessary to cover its dividend payouts over the course of the entire 2020 tax year as a whole, that would potentially trigger a reclassification of already-distributed income to a return of capital for tax-reporting purposes. This is the first time in its history that the fund has even had to make a 19(a) filing to reflect a monthly accounting mismatch, though, meaning it has always generated plenty of income to cover its payouts for both year-end tax and month-by-month accounting purposes.

As such, as long as the underlying portfolio generates at least as much income as the fund pays out over the 2020 tax year as a whole, it's extremely unlikely Pimco Income would have to reclassify any of its dividend payouts as a return of capital. In fact, Pimco's caution in making sure to outearn the fund's full-year dividends, and thus avoid returning capital to shareholders over the entirety of its existence, has been notable.

All in all, there's very little about this event with which to be concerned.

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About the Author

Eric Jacobson

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Eric Jacobson is director of manager research, U.S. fixed-income strategies, for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is a voting member of the Morningstar Medalist Ratings Committee for U.S. and international fixed-income strategies and shares responsibility for determining coverage and research priorities. Jacobson has focused on a variety of taxable, tax-exempt, and nontraditional fixed-income strategies, including several from asset managers such as Pimco, BlackRock, PGIM, and Guggenheim. He has also covered strategies from J.P. Morgan, Fidelity, Goldman Sachs, TCW, Vanguard, Loomis Sayles, Putnam, T. Rowe Price, American Century, Eaton Vance, FPA, and American Funds. He is the team's lead analyst on Pimco.

From 2006 through mid-2008, Jacobson was director of fixed-income strategies for Morningstar Indexes and was responsible for the design and launch of Morningstar's original suite of U.S., global, and emerging-markets bond indexes. Before assuming that role, he was a senior analyst, associate director, and fixed-income editorial director for the fund research team. Before joining the company in 1995 as a closed-end fund analyst, he worked for Kemper Financial Services.

Jacobson holds degrees in political science, Hebrew and Semitic studies, and integrated liberal studies from the University of Wisconsin.

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