Rebound Potential And A 10.6% Yield Make This CEF Very Attractive

| About: Credit Suisse (DHY)

Credit Suisse High Yield Bond Fund (NYSEMKT:DHY) shares appear to have strong potential for both short-term gains in a rebound as well as high monthly payouts for income investors. This is a closed end fund or "CEF" that is managed by Credit Suisse. It primarily invests in high yield (or junk) bonds. As of July 5th, 2013, the fund holds about 266 positions, which means it is solidly diversified.

There are always risks to consider and for a closed end fund that invests in junk bonds, this includes: some interest rate risk, liquidity risk, and economic recession risks, just to name a few. However, with a 10.6% yield, investors are well-rewarded for taking some risks and after the recent decline in bonds and this stock, the potential upside rewards and generous yield make this a compelling investment.

At current levels these shares could be poised for a short-term rebound for a couple of reasons. First of all, we all know bonds have experienced a sharp drop recently and that has pushed these shares down from about $3.40 in May to just around $3. These shares currently trade at a small discount to net asset value which is one reason to buy now because over the past 52-weeks it has traded for about a 5.66% premium (on average) to net asset value. The other reason is because junk bonds could be poised to rebound in general since investors are still looking for income, and this sector still provides some of the best yields. Another reason why junk bonds and this stock don't deserve such a sharp sell-off is because the average junk bond has a relatively short duration, often about 5 years or so. That means duration risk is lower when compared to longer-term bonds. Another positive is that if interest rates move up a little because the economy is getting better (as they have), this should translate into higher credit quality and minimize default rates for junk bond borrowers. These are some major reasons why this stock is attractive now, but there are more:

Investors usually have to wait a while for quarterly dividends to get paid out, but not with this fund. It pays investors every month and that is great since you never have to wait too long for the next payout. In fact, investors who buy in the next few days could be positioned to collect the dividend very soon: These shares will trade ex-dividend on July 15 and the monthly rate is 2.65 cents per share. This provides a very generous yield of 10.6%. The next dividend will be paid on July 23, to shareholders who are on record as of July 17, 2013. Furthermore, it has a consistent history of paying this rate of dividend. With this stock now trading below net asset value of $3.03, instead of its historical 5.66% premium, it makes sense to buy now for a potential rebound and high monthly dividends.

I want to discuss an exchange traded fund that could also be a great option for income investors, but it also can be used as a tool for investing in the Credit Suisse High Yield Bond Fund. The SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK) is an exchange traded fund that also invests in high-yield bonds. Exchange traded funds or "ETFs" trade close to net asset value and this one offers significant liquidity due to the high volume it trades on a daily basis. I like to use this ETF as a proxy for this sector and that means that when "JNK" is up and rebounding as it has been recently, then "DHY" should be performing in a similar way in terms of net asset value. In other words, when "JNK" is rising, "DHY" should eventually do the same.

(Click to enlarge)

(Click to enlarge)

As the charts show, "JNK" has started to rebound from the recent bond market sell-off and "DHY" also bounced. However, even though the junk bond market and "JNK" is off the recent lows, "DHY" is back at recent lows (after an initial rebound spike to about $3.20) and this is giving investors a second chance for an ideal buying opportunity. (Perhaps a large investor or hedge fund needs to raise cash and had to sell, causing the shares to drop even as the junk bond sector rebounds.) Since current net asset value is just over $3 per share, and if it rebounds to the historical average of about a 5.6% premium to net asset value, the shares could once again rise to around $3.20, especially if the junk bond market continues to bounce back.

Here are some key points for DHY:

  • Current share price: $2.95
  • The 52 week range is $2.88 to $3.45
  • Earnings estimates for 2013: n/a
  • Earnings estimates for 2014: n/a
  • Annual dividend: about 2.65 cents per month, which yields about 10.6%

Here are some key points for JNK:

  • Current share price: $39.49
  • The 52 week range is $38.21 to $41.95
  • Earnings estimates for 2013: n/a
  • Earnings estimates for 2014: n/a
  • Annual dividend: about 20 cents per month, which yields nearly 7%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long DHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.