How do funds like PFL and PFN pay ~12% dividend yield and remain solvent?
The balance sheets seem to show huge swings on profitability and I don’t believe these funds have assets they can deprecate like a REIT.
How do these funds operate?
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5Maybe I'm missing something, but ETFs pay out dividends based on the dividends of its constituents, not its own operating income.– D StanleyCommented Oct 3, 2022 at 19:54
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If these funds are operating in the red, or with wild swings in profitability, how are they consistently paying a high dividend? Sure, their constituents pay them, but from the balance sheet it looks like cash out exceeds cash in from constituents.– Jay LauraCommented Oct 4, 2022 at 14:07
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At this link, the monthly distributions not covered by bond income or by capital gain then include a return-of-capital: cefconnect.com/fund/PFN .– S SpringCommented Oct 4, 2022 at 20:12
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Also, a new buyer of the fund doesn't care if the principal values of the holdings have dropped as long as the new buyer gets the current pricing. And if the bond coupons stay the same, with a drop in principal value, then the percentage yield of the fund increases. Otherwise, if adjustable rate bonds begin paying higher rates then principal values could possibly hold.– S SpringCommented Oct 4, 2022 at 21:36
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1 Answer
PFL is a high-yield fixed income ETF, which means it "owns" high-yield bonds on behalf of investors that buy units of the ETF, and passes on the interest (and capital gains) from those bonds as dividends to those unitholders. That cash is not reflected on the balance sheet - at least not in buckets that let you see how much cash was brought in from the bonds and how much was distributed as dividends. The dividend yield is a percentage of the price of the ETF, which should be very close to the value (per unit) of the bonds it holds. The ETF itself makes money from the fees it charges, not the performance of its AUM. Whether the ETF holding company is profitable is much less relevant than the performance of its AUM.
It's not the same model as a company that pays dividends out of its free cash flow, most of which usually comes from the company's operations. The "dividend" for the ETF is a function of its operations, not a distribution to shareholders like a traditional company.
Bottom line - I don't know of any reason to put a lot of emphasis on the financials of an ETF itself - investors focus on the managed assets (stocks/bonds/etc.) of the ETF and the return on those assets, not the profitability of the ETF holding company itself. In fact, I would not be surprised to see ETF companies run in the red just to increase market share.
answered Oct 4, 2022 at 14:40
