AIG - EVT: This 7.47%-Yielding CEF Is A Reasonable Buy Today

Summary

• Eaton Vance Tax-Advantaged Dividend Income Fund invests in a portfolio of dividend-paying stocks to provide investors with a high level of income.
• This fund has a better portfolio than many of Eaton Vance's other closed-end funds, as it excludes the mega-cap technology stocks that declined substantially last year.
• The stocks in the CEF's portfolio generally have a higher yield than the market, and the fund employs leverage to boost the yield further.
• The fund recently cut its distribution, but it appears that the new payout is sustainable and it is still higher than the fund's past distributions.
• The Eaton Vance Tax-Advantaged Dividend Income Fund is currently trading at a very reasonable valuation.

One of the biggest problems facing many Americans today is the incredibly high level of inflation that has been permeating the economy. The consumer price index has generally increased by more than 7% year-over-year during every month over the past year, although it did recently dip down to 6.5% year-over-year:

This inflation has generally been centered around the necessities of food and energy, so it has had a major impact on those individuals of somewhat limited means. In fact, a recent Prudential Pulse survey states that approximately 81% of Generation Z members and 77% of Millennials have recently taken on second jobs or entered the gig economy in order to obtain the extra money that they need to keep their families. This is one reason why the unemployment rate has stayed stubbornly low despite the Leading Economic Indicators showing a steady decline in economic activity.

Fortunately, as investors, we do not need to resort to taking on additional work in order to generate the extra income that we need to keep ourselves fed today. We can, after all, put our money to work for us. One of the best ways that we can do this is to invest in a closed-end fund ("CEF") that specializes in the generation of income. These funds are quite nice because they provide easy access to a professionally-managed portfolio of income-producing that can frequently generate a higher yield than any of the underlying assets possesses.

In this article, we will discuss the Eaton Vance Tax-Advantaged Dividend Income Fund ( EVT ), which is one closed-end fund that investors can use for income generation. As of the time of writing, this fund yields 7.47%, which is certainly enough to turn the heads of most income hunters even though it is not as high as some funds yield. I have discussed this fund before, but several months have passed since that time so a few things have changed. In particular, the fund released its full-year financial report, so we have updated data for our analysis of how well the CEF performed during the first several interest rate hikes that caused havoc in the markets last year. This article will naturally focus specifically on the changes to Eaton Vance Tax-Advantaged Dividend Income Fund over the past few months as well as provide readers with an updated analysis of its finances.

About The Fund

According to the fund’s webpage , the Eaton Vance Tax-Advantaged Dividend Income Fund has the stated objective of providing investors with a high level of after-tax total return. This is not surprising as the use of the word “dividend” in the fund’s name implies that it invests primarily in equities. After all, bonds do not pay dividends. This is certainly the case, as 80.05% of the fund’s portfolio is invested in common equities, although it does have both preferred equities and bonds in its portfolio:

Common equities are by their very nature a total return vehicle. After all, we generally invest in common equities with the expectation of receiving both dividend income and capital gains. This is the fund’s expectation as well, as it specifically states that it purchases dividend-paying common equities. According to the description in the fact sheet ,

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

Thus, the fund appears to be using a dividend investing strategy, which is a fairly popular strategy among investors that are seeking dividend income and portfolio growth over time. This is quite obvious when we look at the popularity of dividend stocks here at Seeking Alpha. Curiously, the fund makes no mention of seeking out those stocks that raise their dividends over time, although many of the best dividend-paying companies do that anyway. It would be nice to get some insight into this from the fund’s management, however. This is because anyone trying to overcome inflation will want to see their income increase over time, since this is the only way to overcome the loss of purchasing power that accompanies inflation.

In previous articles on Eaton Vance’s closed-end funds, I pointed out that the portfolio was very strange for an income fund. In particular, their portfolios were frequently heavily weighted toward mega-cap technology stocks that have nothing to offer in terms of dividends. It is nice to see that the Eaton Vance Tax-Advantaged Dividend Income Fund is very different. It actually sticks to its stated philosophy of investing in dividend-paying stocks, which we can see by looking at the largest positions in the portfolio:

The first thing that we notice here is that, with the exception of Alphabet ( GOOG ) and possibly Walt Disney ( DIS ), we have fairly good dividend-paying stocks here. Most of these companies boast yields that are higher than the 1.58% current yield of the S&P 500 Index ( SPY ):

The inclusion of Alphabet and Disney is somewhat surprising considering that neither of these companies pays a dividend currently. With that said, Disney did have a pretty good history as a dividend-paying stock and many investors are expecting a restoration soon. However, due to the need to invest in content for Disney+, some analysts are expecting that the company will not restore the dividend in the near future. Fortunately, the fund’s exposure to these non-dividend stocks is pretty minimal and they are unlikely to have a huge impact on the fund’s income or overall performance. This could be a good thing, considering that both Alphabet and Disney delivered a very disappointing performance over the past twelve months.

One thing that is nice to see here is that the Eaton Vance Tax-Advantaged Dividend Income Fund has some exposure to the traditional energy sector. In fact, this sector accounts for 8.38% of the portfolio:

I recently criticized another Eaton Vance fund for completely ignoring this sector, which was by far the top-performing one in 2022. The iShares U.S. Energy ETF ( IYE ) gained 34.65% in the past twelve months. That is much better than the losses that pretty much every other sector handed to investors over the same time period. This strong performance was delivered by high energy prices that allowed the five largest publicly-traded oil companies to earn a record $200 billion in 2022. Analysts are currently projecting 2023 profits for these five companies to come in at a lower $150 billion, but that is still a very impressive number. This is one of the reasons why many companies in the industry either hiked their dividends or issued a special dividend over the past twelve months. In other words, these are exactly the companies that a dividend-income fund should be holding and it is nice to see that this lesson has not been lost on the Eaton Vance Tax-Advantaged Dividend Income Fund.

As my regular readers on the topic of closed-end funds are no doubt well aware, I generally do not like to see any individual position account for more than 5% of a fund’s portfolio. This is because that is approximately the point at which the asset begins to expose the fund to idiosyncratic risk. Idiosyncratic, or company-specific, risk is that risk that any asset possesses that is independent of the market in aggregate. This is the risk that we aim to eliminate through diversification but if the asset accounts for too much of the portfolio, then this risk will not be completely diversified away. Thus, the concern is that some event may occur that causes the price of a given asset to decline when the market as a whole does not. If that asset accounts for too much of the portfolio, then it could end up dragging the entire fund down with it. As we can clearly see above though, this is not something that we really need to worry about with this fund as there is no individual asset that accounts for such a heavy weighting in the portfolio. Thus, the Eaton Vance Tax-Advantaged Dividend Income Fund appears to be reasonably well-diversified.

Leverage

In the introduction to this article, I stated that closed-end funds like the Eaton Vance Tax-Advantaged Dividend Income Fund have the ability to pay higher yields than any of the underlying assets possess. One of the ways through which they can do this is the use of leverage. In short, the fund borrows money and uses that money to purchase dividend-paying stocks. As long as the total return from the purchased assets is less than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the overall yield of the portfolio. As the fund can borrow at institutional rates, which are lower than retail rates, this will usually be the case.

Unfortunately, the use of debt is a double-edged sword. This is because leverage boosts both gains and losses. As such, we want to ensure that the fund is not employing too much leverage because this would expose us to too much risk. I generally do not like to see a fund’s leverage exceed a third of its assets for this reason. The Eaton Vance Tax-Advantaged Dividend Income Fund satisfies that requirement as its levered assets comprise 19.23% of its portfolio as of the time of writing. Thus, it appears that this fund is striking a reasonable balance between risk and reward.

Distribution Analysis

As stated earlier in this article, the primary objective of the Eaton Vance Tax-Advantaged Dividend Income Fund is to provide its investors with a high level of total return by investing in dividend-paying stocks. The fund pays out both its dividend income and capital gains in the form of distributions to investors, just like most closed-end funds. The fund also employs leverage to boost the yield of the overall portfolio, as well as boost capital gains. As such, we might assume that the fund has a reasonably high distribution yield.

This is certainly the case, as Eaton Vance Tax-Advantaged Dividend Income Fund currently pays a monthly distribution of $0.1488 per share ($1.7856 per share annually), which gives it a 7.47% yield at the current price. The fund has a reasonably good distribution history since the 2009 recession as it has generally boosted its payout. It did have to cut in November just like most of Eaton Vance’s closed-end funds though:

The fact that Eaton Vance Tax-Advantaged Dividend Income Fund cut its distribution a few months ago will likely be disappointing to those investors that are looking for a safe and secure source of income with which to pay their bills. However, the current distribution is still higher than the level that the fund had prior to August of 2021. We have also seen a number of closed-end funds that are not energy sector-specific funds cut their distributions recently so this one is certainly not unique in that respect.

It is important to keep in mind that anyone purchasing today will receive the current distribution at the current yield. As such, the most important thing for a buyer today is how well the fund can sustain its current payout. Fortunately, the fund’s distributions consist entirely of capital gains and dividend income, so this might impart a certain amount of confidence in its ability to do that:

The one thing that we note is that the fund’s distributions do not include a return of capital component. This may be pleasant to see, since a return of capital distribution can be a sign that the fund is returning the investors’ own money back to them. That is obviously not sustainable over any sort of extended period. However, the high proportion of capital gains in the fund’s distributions may imply the same thing. This is because a capital gains distribution depends on the fund actually having sufficient capital gains on a consistent basis to cover the amount of the distribution. That is not always possible, as we clearly saw in 2022. Thus, it is still very important to analyze the fund’s finances in order to determine how sustainable its distribution is likely to be.

Fortunately, we do have a recent document that we can consult for this purpose. The fund’s most recent financial report corresponds to the full-year period that ended on October 31, 2022. As such, this is a much more recent report than we had available the last time that we discussed this fund. It also should give us a good idea of how well the fund handled the Federal Reserve’s switch to a tight monetary policy in March of 2022, which is the event that caused the market volatility that dominated much of the year. During the full-year period, the Eaton Vance Tax-Advantaged Dividend Income Fund received a total of $51,124,136 in dividends and $18,901,191 in interest from the assets in its portfolio. When we combine this with a small amount of income from other sources, the fund reported a total income of $71,564,695 during the period. It paid its expenses out of this amount, leaving it with $42,568,109 available for the shareholders.

This alone was nowhere near enough for Eaton Vance Tax-Advantaged Dividend Income Fund to cover the $144,381,379 that the fund paid out in distributions over the course of the year. This may be somewhat concerning at first glance as the fund did not have sufficient net investment income to cover the distribution.

However, there are other ways that the fund can generate the income that it needs to cover its distribution. For example, it may be able to generate sufficient capital gains to cover the distributions. As might be expected from the market weakness in 2022, the fund failed miserably at this. It did manage to achieve net realized gains of $100,954,837 but this was offset by $354,193,412 net unrealized losses over the year. The fund’s assets declined by a total of $332,291,317 after we account for all inflows and outflows. This certainly explains the distribution cut as the fund failed to generate sufficient returns to cover its payouts.

With that said, Eaton Vance Tax-Advantaged Dividend Income Fund did manage to get pretty close to covering the distribution through net realized gains and net investment income. These two things together totaled $143,522,946, which was very close to enough to cover the $144,381,379 that was paid out in distributions. Assuming that the fund can generate similar results going forward, it can probably afford to maintain the distribution at the current lower level. However, we will still want to keep an eye on it since any decline in assets makes it harder for management to earn sufficient returns to cover the distribution.

Valuation

It is always critical that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a surefire way to generate a sub-optimal return on that asset. In the case of a closed-end fund like the Eaton Vance Tax-Advantaged Dividend Income Fund, the usual way to value it is by looking at the fund’s net asset value. The net asset value 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 the fund when we can acquire them at a price that is less than the net asset value. This is because such a scenario implies that we are buying the fund’s assets for less than they are actually worth. This is, fortunately, the case with this fund today. As of January 30, 2023 (the most recent date for which data is currently available), the Eaton Vance Tax-Advantaged Dividend Income Fund had a net asset value of $24.99 but the shares only trade for $23.95 apiece. This gives the shares a 4.16% discount to net asset value at the current price. This is relatively in line with the 4.60% discount that the shares have traded at on average over the past month and should prove to be a reasonable price to pay for the fund.

Conclusion

In conclusion, the Eaton Vance Tax-Advantaged Dividend Income Fund looks like a very reasonable fund to add to a portfolio today, if one can get over the fact that the fund cut the distribution a few months ago. This fund has one of the better portfolios of Eaton Vance’s closed-end funds and appears able to sustain its distribution at the current level. The fact that the fund is trading at a discount is quite nice as well since this allows a bit of a margin of error. Overall, this EVT CEF may be worth buying today.

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