The Dodge & Cox Income Fund (“DODIX”) launched in January 1989. It lists among its objectives the seeking of a high and stable rate of current income, consistent with long-term preservation of capital. The fund managers state that the secondary objective is to take advantage of opportunities to realize capital appreciation.
Its strategy to accomplish these objectives is to invest primarily in high-quality bonds, as well as in other debt securities. The investments can span the spectrum of the fixed-income asset class, including government/government-related obligations, mortgage-backed securities (MBS), asset-backed securities (ABS), corporate bonds, municipal bonds and other debt securities. The securities can pay either fixed- or floating-rate coupons. Additionally, the fund can invest up to 20% of its assets in debt rated as below investment grade. These are rated BB+/Ba1 or lower by Standard & Poor’s and Moody’s, respectively.
There is a minimum initial investment of $2,500 for individual accounts, or $1,000 if the investment is made through an individual retirement account (IRA). The fund pays quarterly dividends and distributes capital gains semi-annually.
Breaking the portfolio down by fixed-income sector, corporate bonds were the largest component, comprising 50.1% of the fund as of Dec. 31, 2015, as noted by Morningstar. This is followed by agency MBS pass-through/agency MBS adjustable-rate mortgages (MBS ARM), which accounted for more than 30% of the portfolio. U.S. Treasury securities and ABS trailed behind, representing 4.6% and 4.1% of the fund’s assets, respectively.
U.S. Treasury notes (T-notes) were the three top holdings at the end of 2015. Corporate bonds from two separate issuers rounded out the top five holdings in the portfolio. In total, these represented 5.8% of the portfolio as of Dec. 31, 2015.
The 1.625% T-note due July 31, 2019 had a value of roughly $600 million, representing 1.4% of the assets at the end of 2015. This is followed by the 1.625% note due Dec. 31, 2019 and the 1.5% note due Feb. 28, 2019, each with a value of about $500 million, or a 1.16% weight.
T-notes are intermediate- to long-term investments that are generally issued with maturities of two, three, five, seven and 10 years. Issued and backed by the full faith and credit of the U.S. government, the notes are considered risk-free investments because investors feel highly confident in receiving the principal at maturity. It is worth noting that the values of the notes will fluctuate inversely with changes in interest rates, although the full face values, known as par, will be paid when the notes come due.
Verizon Communications Comes in Fourth
Verizon Communications, Inc. (NYSE: VZ) has 6.55% notes due in 2043, representing the fourth-largest holding in the income fund’s portfolio. Its 2015 year-end value of $479 million accounts for 1.1% of the portfolio.
Verizon Communications is a large provider of communications, information, and entertainment products/services to consumers, businesses and governmental agencies. In 2015, the company generated $38 billion in cash flow from operations, and spent $17.8 billion on capital expenditures. This equates to free cash flow of $21.2 billion.
The company’s 2015 revenue grew 3.6% from the year-ago period, to $131.6 billion, while operating income rose nearly 69% to $33.1 billion.
Rio Oil Rounds it Out
The Rio Oil Finance Trust’s 6.25% note due in 2024 was valued at $438.7 million on Dec. 31, 2015, which is about 1% of the fund’s assets. These are issued by the trust, but backed by the royalties owed by oil companies to the government of Rio de Janeiro. The predominant oil company is Petroleo Brasileiro S.A. (NYSE: PBR), which is more commonly known as Petrobras.
Fitch Ratings downgraded its ratings to BB- from BB+ in January 2016. It cited lower oil prices, a risk of longer-term production being cut and an increase in political risk.
Year-to-date (YTD), as of March 28, 2016, the fund has returned 1.76%, trailing the Barclays Capital U.S. Aggregate Bond index 2.51%. Its one-year return of 0.09% lagged the index by 1.48%, and its five-year return of 3.7% was roughly in line.