Pioneer Diversified High Income: This Bond CEF Is A Strong Buy With A 9.6% Yield

Mar.25.14 | About: Pioneer Diversified (HNW)

Summary

Despite "tapering" talk and the chance for higher rates next year, interest rates are likely to remain low for years.

Even if interest rates rise next year, it probably won't be by much due to a weak recovery and low inflation.

This economic and low rate environment makes select high yield closed end funds very attractive with yields near 10%.

While this closed end fund typically trades for a significant premium to net asset value, it now trades near parity and pays a dividend every month.

There has been a lot of talk about tapering and higher interest rates in the past few months, but the reality is that we remain in a very low interest rate environment. Even if rates "rise" in a year or so, the increase is likely to be nominal, especially since the global economy is growing slowly and continues to see new challenges to growth with Russia and Crimea, China, etc. Certificates of deposit yield next to nothing, with interest rates of much less than 1%, even for a five year CD. That means there are much better places to park your money, if you look off the "beaten path". Junk bonds offer generous yields, but closed end funds or "CEF's" that focus on this sector can be one of the most lucrative opportunities for investors.

One of my favorite closed end funds is the Pioneer Diversified High Income Trust (NYSEMKT:HNW), which primarily invests in high yielding bonds. This fund has around 427 holdings. This shows it is well diversified and it reduces risks for investors. Duration risk is another potential downside for bond investors, however, this fund has an average duration of just 3.16 years, which mitigates this potential risk. Recent data indicates that about 48% of the portfolio is maturing in 1 year or less, and about 29% is maturing in 4 years or less.

This fund typically trades at a premium to net asset value or "NAV", because investors appreciate the short duration average and because of the high yield. For the past year, this fund has traded (on average) at a 3% premium to net asset value, and for even as much as a 9.29% premium. However, it is trading for about $20 per share now which is right around current net asset value. That makes it a strong buy at this time, since it's a rare chance to get in without paying significantly more.

Other factors also make it a strong buy, and that includes the generous yield of about 9.6% and the fact that it pays a monthly dividend at a rate of 16 cents per share. For most income investors, getting paid every month is much better than a quarterly dividend, since it is never a long wait before you get paid again. (This fund typically goes ex-dividend around the 14th of each month.)

In the junk bond sector, many investors opt for the well-known SPDR Barclays Capital High Yield Bond (NYSEARCA:JNK), which is an exchange traded fund or "ETF". The size of this fund and the heavy trading volumes provides liquidity for even institutional investors. This fund has about 631 holdings in its portfolio which means it is well-diversified. However, with a monthly dividend of about 20 cents per share which provides a yield of 5.9%, investors are leaving a lot of money on the table when compared to the yield of 9.6%, for the Pioneer Diversified High Income Trust. While institutional and very large investors may be forced to stick with the lower yields in exchange for the higher liquidity provided by this ETF, other investors should consider the Pioneer Diversified High Income Trust. Over time, the power of compound interest at a rate of 9.6% (versus 5.9%) can make a tremendous difference for investors. To read about another high yield investment that I believe is a strong buy, read this article.

Here are some key points for the Pioneer Diversified High Income Trust:

Current share price: $20.20
The 52 week range is $19.06 to $22.69
Earnings estimates for 2014: not applicable
Annual dividend: $1.92 per share (or 16 cents per month), which yields 9.6%

Here are some key points for SPDR Barclays Capital High Yield Bond:

Current share price: $41.12
The 52 week range is $38.21 to $41.95
Earnings estimates for 2014: not applicable
Annual dividend: about $2.40 or (20 cents monthly) per share which yields 5.9%

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 HNW. 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.