CEFs With Yield: Pioneer Diversified High Income Fund (HNW)
Dividend Yield: 9.1%
The Pioneer Diversified High Income Fund (HNW) seeks income through investments in several sectors of the high-yield bond market. Specifically, HNW specializes in global credit, with the majority of its portfolio allocated to U.S. high yield, senior loans, event-linked securities and emerging markets. With the exception of the catastrophe bond sleeve, the stated portfolio mix is not uncommon in the CEF marketplace.
For those that are not familiar with catastrophe bonds, or “cat” bonds, they are sold by insurance companies seeking alternative means of reinsurance and risk-transfer through capital market investment. The coupon rate traditionally floats in relation to an index similar to senior loans, while the principal value is attached to natural disasters or other insurance claims. Interestingly, if a natural disaster does occur, there are triggers that can lead to principle forgiveness or writedowns to investors. Conversely, if no loss claims occur, investors stand to collect very attractive cash flows as event-linked bonds are typically rated below investment grade.
HNW has a long history of not only trading at a premium, but also earning more than it distributes to its shareholders. Currently the portfolio has a comfortable buffer of out-earning its distribution policy of 16 cents per month by a margin of roughly 1 cent per month. Although credit conditions might be overextended in the near term, HNW’s management team has a knack for taking advantage of esoteric and small float issues most other managers or ETFs avoid altogether.
By dodging mainstream credits, HNW has the potential for shaping an attractive income and risk profile.