AMZN - ETO: Strong Performance And Global Exposure Provide An Income Opportunity

2023-07-13 19:00:12 ET

Summary

• Investors are desperately in need of income today due to the rapidly-rising cost of living.
• Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund invests in a portfolio of dividend-paying common stocks and fixed-income assets to generate a high level of income for investors.
• The fund outperformed the MSCI World Index over the past six- and twelve-month periods, although it has been underperforming the S&P 500 Index.
• The fund managed to cover its 7.14% yield handily in the most recent six-month period and it is probably sustainable unless the market sharply corrects.
• The fund is currently trading for a reasonably attractive valuation.

There can be little doubt that one of the biggest problems facing the average American today is the rapidly rising cost of living. The government's response to the pandemic resulted in an enormous amount of new money being created without the economic activity needed to back it, and it caused the price of everything to shoot up once it entered circulation and people began to spend it.

This rise in the general price level is illustrated by the consumer price index , which claims to measure the cost of a basket of goods that is regularly purchased by the average person. As we can see here, the consumer price index has increased by more than the 2% year-over-year rate that economists consider to be healthy during each of the past twelve months:

While the rate of inflation has been dropping, it is important to keep in mind that inflation compounds, just like the stocks that we have in our portfolios. In this case, it works against us as the improvements are coming on top of high inflation during the prior year's month. As such, the total increase represents substantial increases over the price level in 2020 or 2021. As I discussed in a recent blog post , this has had a devastating effect on consumers. We are seeing millions of people have to choose between spending their money on toothpaste and food. There has even been an increase in the number of people that are resorting to dumpster diving just to cut their weekly grocery bill to an affordable level. In short, people are in desperate need of more income and are taking it wherever they can get it.

As investors, we are certainly not immune to this. After all, we need to purchase food and heat our homes just like anyone else. Fortunately, we do have methods that we can use to get some extra money so that we do not need to resort to some of the extreme methods that I just mentioned. We can always put our money to work to earn the extra income that we need to maintain our lifestyles in the current environment. One of the best ways to do this is to purchase shares of a closed-end fund, or CEF, that specializes in the generation of income.

Unfortunately, these funds are not particularly well-followed in the financial media, and many investment advisors are unfamiliar with them so it can be difficult to obtain the information that we would like to have to make an informed investment decision. This is a shame, because many of these funds offer advantages over ordinary open-ended and exchange-traded funds. In particular, closed-end funds are able to employ certain strategies that allow them to boast higher yields than just about anything else in the market.

In this article, we will discuss the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund ( ETO ), which is one fund that investors can use to earn a high level of income from their portfolios. The fund boasts a respectable 7.14% yield at the current price, which is admittedly not as good as some other closed-end funds, but it is still well above the rate that is currently being offered by money market funds. I have discussed this fund before, but a few months have passed since that time so naturally a few things have changed. This article will focus specifically on these changes as well as provide an updated analysis of the fund's finances. Let us investigate and see if this fund makes sense for your portfolio today.

About The Fund

According to the fund's webpage , the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund has the stated objective of providing its investors with a high level of after-tax total return. This is not particularly surprising considering that this is an equity closed-end fund. The fund's fact sheet describes its strategy:

The fund invests primarily in global dividend-paying common and preferred stocks and seeks to distribute a high level of dividend income that qualifies for favorable federal income tax treatment.

The fund's portfolio generally supports this stated blend of common and preferred stocks, although it is very highly weighted towards common equities. As we can see here, 81.84% of the portfolio is invested in common equities with nearly all of the rest in fixed-income securities:

Thus, we can consider this to be a common equity fund that has a bit of fixed-income exposure to boost its yield compared to an all-common stock portfolio. One interesting thing that I notice here though is that the fund's preferred stock allocation is a lot smaller than we would expect given the fact sheet's description of its strategy. In fact, the fixed-income allocation in the fund's portfolio consists mostly of investment-grade bonds, not preferred stock. It says nothing about bonds in its description. This is an important difference though since investment-grade bonds usually have substantially lower yields than preferred stock.

We can see this very quickly in the fact that the iShares Preferred and Income Securities ETF ( PFF ) yields 6.85% today compared to the 2.84% yield of the iShares Core U.S. Aggregate Bond ETF ( AGG ). It makes sense, too, that preferred stock would have higher yields than investment-grade bonds since preferred stock is junior to bonds in the capital stack so is an inherently riskier investment vehicle. The fact that this fund is invested much more heavily in investment-grade bonds than preferred stock means that its investment income is lower than it could be. This is disappointing for income-focused investors.

The fund's fact sheet specifically states that the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund invests its assets in dividend-paying stocks from around the world. However, as I have noted in past articles about Eaton Vance's closed-end funds, many of them state this but are actually invested very differently. This one shares that problem, which we can see by looking at the largest positions in the fund. Here they are:

The problem is found in the fact that many of the fund's largest holdings either do not pay a dividend or do not pay much of one. Here are the current yields of each of the stocks on this list:

The four giant American technology companies make no sense to include in an income fund, as none of these companies provide their investors with any income! We could argue that Microsoft and Apple both pay dividends, but at the current price, the dividend yield is so low that the stock may as well not be paying one. In the case of both Alphabet and Amazon.com, the only way to get income from them is by selling covered call options against them (which this fund does not do) or by selling them.

It is likely that their presence is so that the fund does not trail the S&P 500 Index (SP500) by too much, since a large percentage of the index's performance over the past several years has been driven by these four stocks (see here ), but this does not change the fact that the fund would have substantially higher income and a much higher effective yield if it were to get rid of these four positions and add anything with a dividend. An energy company and an American financial firm could be a good place to start.

The fund's largest positions are mostly the same as they were the last time that we looked at the fund, although there have been a few changes. In particular, The Walt Disney Company ( DIS ), Coca-Cola ( KO ), Novo Nordisk ( NVO ), and ConocoPhillips ( COP ) have all been removed from the largest positions in the fund. In their places are Bayerische Motoren Werke, Credit Agricole, and Societe Generale. The fund also did not have the money market fund position the last time that we discussed it, so presumably it sold off some of its prior holdings and has not yet deployed all of the capital. This is unsurprising, since it does seem that most things outside of the traditional energy sector are overvalued right now. We also see that a few of the fund's positions saw their weightings change, but that could be caused by one stock outperforming another in the market. It is not necessarily caused by the fund actively trading stocks to alter its positions.

This is important because it costs money to trade stocks or other assets, which is billed directly to the fund's shareholders. This creates a drag on the fund's performance and makes management's job more difficult. After all, the fund's managers need to earn sufficient returns to cover these extra costs and still give the shareholders a return that is reasonably competitive with most of the other things in the market. This is a difficult task that very few fund managers are able to accomplish on a consistent basis, which is one reason why actively-managed funds tend to underperform their benchmark indices. This fund does not, strictly speaking, have a stated benchmark index, but it has done reasonably year-to-date:

As of June 30, 2023, the fund had delivered a 14.96% total return year-to-date and 19.11% over the trailing twelve-month period. Here is how that compares to two major indices for comparison purposes:

We can see that this fund typically trails the S&P 500 Index but manages to beat the MSCI World over the past year. It does this with a higher yield than either index, which will probably appeal to any income-focused investor. However, please note that the above figures assume that all dividends paid by the three assets are reinvested and not taken as income to the investor. While it is perfectly acceptable to spend the income that you receive from a given asset, it will obviously lower your return because that money will not be available for compounding purposes. Also, in the case of the Eaton Vance fund, the numbers used are the returns of the actual portfolio and not its shares in the market. That raised the figures somewhat since the portfolio typically delivers higher returns than the fund's shares. This can sometimes create buying opportunities for investors, which we will discuss later in this article.

Distribution Analysis

As mentioned earlier in this article, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund has the stated objective of providing its investors with a high level of total return. This is not surprising considering that the fund invests mostly in common equities, which are a total return vehicle by their very nature. However, the fund claims to invest mostly in dividend-paying stocks and has some exposure to fixed-income securities that deliver the majority of their investment returns as direct payments to the investors. As is the case with most closed-end funds, this one aims to maintain a relatively stable asset value and pay out both its investment income and capital gains to the shareholders. As such, we can assume that it would sport a reasonably attractive distribution yield.

That is certainly the case here, as the fund pays a monthly distribution of $0.1374 per share ($1.6488 per share annually), which gives it a 7.14% yield at the current price. Unfortunately, the fund has not been particularly consistent in its distribution over the years. In fact, it cut the distribution last November:

This is something that is probably going to be something of a turn-off to those investors that are looking for a safe and secure source of income to use to pay their bills and finance their lifestyles. However, most of Eaton Vance's funds had to cut their distributions around the same period. That was probably due to the fact that many of the funds from this particular fund house are heavily weighted to the American mega-cap technology stocks and these stocks substantially underperformed the broader market in 2022. I pointed this out in a blog post several months ago.

However, as I have noted before, the fund's history is not necessarily the most important thing to anyone purchasing the fund today. This is because today's buyer will receive the current distribution at the current yield. As such, the most important thing for anyone buying today is how well the fund can maintain its current distribution. Let us investigate this.

Fortunately, we have a very recent document that we can consult for this purpose. The fund's most recent financial report corresponds to the six-month period that ended on April 30, 2023. This is nice because it is only a few months old and can give us a lot of insight into how well the fund covered the first six months of distributions at the new lower level. It also will give us a good idea of how well the fund managed to perform in the market rally that we have seen so far this year.

During the six-month period, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund received $9,046,608 in dividends along with $2,024,448 in interest from the assets in its portfolio. This gives the fund a total investment income of $11,071,056 during the period. It paid its expenses out of this amount, which left it with $6,087,152 available for the shareholders. As might be expected, that was nowhere close to enough to cover the $13,510,381 that the fund actually paid out to its investors over the period. At first glance, this may be concerning as the fund's net investment income was not enough to cover its distributions.

However, this fund does have other methods through which it can obtain the money that it needs to cover the distributions. For example, it might have capital gains that it could pay out as capital gains are not included in net investment income. Fortunately, the fund had a great deal of success in this as it reported net realized gains of $10,145,289 and had another $34,150,676 net unrealized capital gains. The fund's assets increased by $36,872,736 over the period after accounting for all inflows and outflows.

This is nice, as it shows that the fund not only had enough to cover its distributions but it had enough capital appreciation to cover the distribution for quite some time. Overall, the distribution should be reasonably safe for a while unless the market experiences another correction like we saw back in 2022. That is possible if the Federal Reserve shows integrity and does not cut rates at the first sign of a recession, but the market seems to strongly want to remain optimistic.

Valuation

It is always critical that we do not overpay for any assets in our portfolio. This is because overpaying for any asset is a surefire way to earn a suboptimal return on that asset. In the case of a closed-end fund like the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund, the usual way to value it is by looking at the fund's net asset value. The net asset value of a fund is the total current market value of all of the fund's assets minus any outstanding debt. This is therefore the amount that the shareholders would receive if the fund were immediately shut down and liquidated.

Ideally, we want to purchase shares of a fund when we can obtain them at a price that is less than the net asset value. This is because such a scenario implies that we are purchasing the fund's assets for less than they are actually worth. This is, fortunately, the case with this fund today. As of July 12, 2023 (the most recent date for which data is available as of the time of writing), the Eaton Vance Tax-Advantaged Dividend Opportunities Fund had a net asset value of $25.26 per share but the shares currently trade for $23.43 each.

This represents a 7.24% discount to the net asset value at the current price. That is a reasonable price, but it is not as good as the 8.42% discount that the fund had on average over the past month. Thus, it might be possible to wait and get a better entry price in the near future. The current price is not horrible, though.

Conclusion

In conclusion, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund looks like a reasonable way to get a high level of income and global exposure today. The fact that this fund has been beating the MSCI World Index speaks well for its management, but it does have some holdings that make no real sense for an income-focused fund. It can be argued that the four American technology firms in the fund's largest positions are overvalued today, so there is also that problem. The fund did manage to deliver a very solid performance in the first half of the year though and its distribution appears to be reasonably safe. When combined with its attractive valuation, an investor could certainly do worse here.

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