Money saving and growth concept.

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Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on July 26th, 2022.

Eaton Vance Tax-Advantaged Dividend Income Fund (NYSE:EVT) has given only a few rare opportunities to get a truly good deal in the last few years. The fund had begun trading at an inexplicable premium rather regularly. That was after years of staying at a deep discount. I initially purchased a batch of these shares in 2020.

I then sat on a rather small position until we got another opportunity. That came with 2022 as the broader markets have sold off. I bought it in February, which turned out to be too soon. I then bought it again last month as equity markets once again put in another low for the year. While it has been recovering a bit since, and the markets haven’t made another low, EVT remains on my list of positions I want to add to when there are opportunities.

At this time, the premium has become just a bit more elevated since our last update. The overall market remaining low could be presenting an opportunity. I believe this puts it in a position where one could possibly buy for the long term. However, still reserving some space to be able to allocate more at a later, potentially more opportune time. With a new semi-annual report available, it’s worth taking an updated look at the fund regardless.

The Basics

  • 1-Year Z-score: 1.43
  • Premium: 3.10%
  • Distribution Yield: 7.81%
  • Expense Ratio: 1.09%
  • Leverage: 20%
  • Managed Assets: $2,236.4 billion
  • Structure: Perpetual

EVT focuses on “dividend-paying common and preferred stocks and seeks to distribute a high level of dividend income that qualifies for favorable federal income tax treatment.” They also include a “value investment style and seek to invest in dividend-paying common stocks that have the potential for meaningful dividend growth.” The investment objective is to “provide a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation.”

They mostly invest in the U.S. but have a small allocation to international positions, primarily in Europe. To meet this tax-advantaged objective, they will primarily use long-term capital gains and qualified dividend income to reduce the tax burden. This can make it more appropriate for a taxable account.

The fund is a considerable size for a CEF. This generally provides more liquidity for investors with a higher average daily trading volume.

EVT operates with leverage. For risk-averse investors, this might not be appropriate. This can add volatility and potentially higher expenses at this time, given the higher interest rates the Fed is putting through.

With the latest report, we haven’t seen this creep in yet. The total expenses, including leverage, came in at 1.25%—only one basis point above the 1.24% shown at the end of fiscal 2021. The period’s end was April 30th, 2022. Meaning the Fed funds rate had barely budged yet.

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Data by YCharts

Additionally, EVT has a track record of moderate leverage.

Performance – Discount Becoming Rare

The fund has historically shown a strong track record. That can be quite easy, as much of the last decade has been a strong bull market. On the other hand, the fund launched in 2003, so it has already gone through a couple of market bears. The annualized returns can be seen below.

EVT Annualized Performance

EVT Annualized Performance (Eaton Vance)

Against the S&P 500, the fund has come in quite short. If you expect an outperformance there, I would look at other funds.

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YCharts

For one, the fund isn’t invested anything like SPY is. Nor is it trying to. It benchmarks against the Russell 1000 Value Index instead. Against that index, the performance is more comparable. They also utilize a blended benchmark since they have a small weighting to preferred securities. We also see some small exposure to high yield and foreign equity. Those areas are also not represented by the indexes that make up its benchmark.

The results shared below are annualized as of April 30th, 2022.

EVT Annualized Benchmark Comparison

EVT Annualized Benchmark Comparison (Eaton Vance)

They have an overweight on the financial sector that has vastly underperformed the growthier tech sector that dominates the S&P 500. In my opinion, that’s part of what makes it more of an exciting position. At least one to consider if you feel that you are too overweight in tech. Being overweight tech is an easy occurrence to have to happen if you are mainly buying the other diversified funds.

I would also say that EVT is designed to provide investors with distributions as a CEF. That includes income and capital gains sources and could even include return of capital distributions. Since they don’t retain the capital, they don’t experience the compounding or growth that an individual company would.

Historically, the fund has averaged a discount of around 5%. That was for over the last decade. We can see there was an almost persistent discount prior to 2018. The fund had then begun to flirt with a premium. That was before once again going to a fairly deep discount in 2020.

Since then, the premium has been pretty stubborn still. Only this time, the overall stock and bond market being down is combined with this slight premium to make it not a half-bad investment.

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YCharts

Distribution – Attractive 7.81% Rate

As mentioned above, one of the benefits of investing in a CEF is the regular payouts to shareholders. EVT has provided pretty regular and predictable distributions over the years. There was only one cut. That was during the great financial crisis.

EVT Distribution History

EVT Distribution History (CEFConnect)

The fund’s distribution comes to 7.81%, but due to the slight premium, the actual NAV rate comes to 8.05%. That means the fund has to earn more than what investors are getting for a yield. That isn’t ideal and is another important reason to be aware of discounts and premiums for CEFs.

Like so many other mostly equity funds, EVT will have to rely significantly on capital gains to fund its distribution. Even in a bear market, there can be gains to be found. EVT is one of those funds that can highlight this. The 6-month period shows us that net investment income plus the realized gains have funded the distribution.

While markets have continued lower since this report, the first quarter was still a rough one across the board. Seeing that they had covered the distribution is encouraging. NII coverage here is almost 32%, with the remainder being more than covered through the realized gains.

However, we shouldn’t ignore what we see going forward. It will still be challenging because we can clearly see the unrealized appreciation in the portfolio was significant.

EVT Semi-Annual Report

EVT Semi-Annual Report (Eaton Vance)

In my opinion, the ~8% level of the distribution also seems reasonable and sustainable. However, it is something we should monitor at this time. If the market continues going lower, that could put more pressure on the fund to maintain its distribution.

EVT’s Portfolio

EVT reported a fairly low turnover at 14% in the last six months. That compares with the 30% for fiscal 2021. In the last five years, 2017 showed a high watermark of 85%.

Here’s a look at the asset mix of the fund at the end of March 2022. The data here is a bit dated but is fairly consistent with the prior amounts we often see. Basically, we would expect the mix to stay fairly consistent with a lower turnover fund. The fund also hasn’t historically shown to have wild gyrations between updates. This can just help provide some color on how the fund is positioned.

EVT Asset Breakdown

EVT Asset Breakdown (Eaton Vance)

With the latest update, the weighting of the fund remains firmly in the financials sector as well. Healthcare, energy industrials, and utilities are all significant sector weightings in the fund. The most notable of these sectors also is that they all outweigh the 7.6% weighting in tech. That helps highlight why we shouldn’t expect EVT to perform similarly to the S&P 500. They are clearly tilted towards more value-oriented sectors.

EVT Sector Weighting

EVT Sector Weighting (Eaton Vance)

This is reflected in the fund’s top ten positions too.

EVT Top Ten

EVT Top Ten (Eaton Vance)

JPMorgan (JPM) takes the top spot. In fact, the weighting of JPM is up slightly from the 3.53% we saw at the end of March. Johnson & Johnson (JNJ) also comes in the second spot. JPM is a personal position that I hold directly. Their latest earnings were rather lackluster.

The fact that they aren’t planning to raise their dividend and are suspending the buyback can be frustrating. However, some small sacrifices for the short-term. However, I believe it leaves them better positioned in the long term. Especially if we do enter a real economically-challenging environment.

There was a bit of a flip in the third position for the fund. Alphabet (GOOG) sank with ConocoPhillips (COP) moving its way up. GOOG is the only tech play in the fund’s top ten. During the period being reflected from the prior update to the end of May, we can see that COP simply didn’t fall as much as GOOG.

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YCharts

As I’m typing this, though, GOOG has just announced their earnings.

They missed analysts’ expectations on both EPS and revenue. However, the market seemed to be announcing something worse as shares are rising in the after-hours. Mostly just reversing the losses seen in the normal trading hours.

GOOG Price

GOOG Price (Seeking Alpha)

The logic behind missing and still being up is that Snap (SNAP) had caused quite the stir in the market. SNAP was sold off hard after their earnings were missed, and they pulled guidance. Now that GOOG has once again shown they aren’t in the same league – as we really should have expected – there is some relief.

The tenth largest position in the fund here is a money market fund for their cash position that we are seeing show up.

Conclusion

EVT was able to generate enough profits to cover its distribution. The premium continues to remain sticky, but we are still in a down market that could potentially be representing an opportunity. I wouldn’t go all in at these levels, but I don’t think it would hurt for a long-term investor to nibble. That’s basically how I concluded our last update, and it remains the case now.