SPY - Voya Global Equity Dividend: 9.2% Yield What's Not To Like?

2023-07-06 14:07:05 ET

Summary

• Voya Global Equity Dividend generates a big yield.
• The fund does not use leverage and actually trades at a big discount.
• Here's why you could still go wrong with the 9% yield.

Covered calls (just like Sith Lords for Obi-Wan ) are our specialty. They allow us to generate quality income while choosing the exact point where we're ready to take longer-term ownership of a stock. If the price falls enough, we end up owning the stock. If it does not, even better, we make our high income without taking longer-term ownership. Many closed-end funds are engaged in the same general concept, although there are some big differences in the way the CEFs approach the covered call positioning vs. how we do it. We look at one fund today, Voya Global Equity Dividend ( IGD ), and see if it can serve your income needs.

The Fund

IGD focuses on providing income as many funds in this category do.

The primary investment objective of the Fund is to seek to provide investors with a high level of income from a portfolio of global common stocks with historically attractive dividend yields and premiums from call option writing. Under normal market conditions, the Fund will invest at least 80% of its managed assets in a portfolio of common stocks of dividend paying companies located throughout the world, including the U.S. The Fund’s secondary investment objective is capital appreciation.

Source: CEF Connect

While most cite capital appreciation as a secondary objective almost none of them have succeeded in even preserving the original NAV. IGD was started in 2005 with an inception NAV of $19.06. You paid $20.00 if you bought the IPO.

At last check the fund was trading at $5.20, so they definitely are not going to come close to creating capital appreciation on longer time frames. That said, many investors are only interested in income. Let's see how that objective is going.

Structure

The fund is a modest sized one with about $460 million in assets. This number is the same as the total common assets as no leverage is used. The expense ratios nearing 1% are about par for the course for these type of funds.

The fund has a value tilt and you can tell that right away as you have to go to the seventh and eighth positions to find information technology and consumer discretionary sectors.

By comparison, this is where the S&P 500 ( SPY ) stood at the end of June 2023.

The fund has half the exposure to consumer discretionary as SPY and technology is just one-fifth that of SPY. The fund is massively overweight financials, utilities, energy and consumer staples. Moving to the individual holdings, one can see familiar healthcare names like Johnson & Johnson ( JNJ ), Merck ( MRK ) and AbbVie ( ABBV ) dominating the top of the roster.

The fund is not making any big bets and there are 255 total holdings. With the annual portfolio turnover in the high 70s you can expect a lot of churn in these names. One thing that might not be apparent from the top 10 holdings is that the fund does go outside the US as it's a "global" fund. Country weightings were about in line with global developed markets index methodology which places US at the center of all things important.

Options

There are many ways funds employ options. Most focus on a mechanical approach on the underlying holdings and stay slightly out of the money. The job of these options is to try and capture extra income without giving away underlying positions. IDA does things a bit differently. In fact, it took as some time to spot where the options were as the portfolio disclosure only included the common stocks. The reason for that is the type of options they sell. The options are OTC options that they sell to counterparties and their last known option positions are shown below.

This is fairly unusual as they are using OTC options on funds where there are ETFs available. We have Consumer Staples Select SPDR Fund ( XLP ). In fact the options being sold are on that fund. Except that they are not the ones that trade on the exchange but are being sold to a counterparty. We're uncertain as to what the advantage is. Perhaps it's customization and ability to sell a large block without disrupting pricing. You can see that the hedges are being deployed on sectors where IDA has the highest weightings.

OK, so that's how they do it. But how much did they make? The below is not meant to be a vision test and you can open the page 7 of the annual report here to see the numbers we have highlighted.

The fund's option income, including unrealized gain on open option contracts, was about $1.05 million. This works out to about 10% of net investment income from dividends.

This for us, is extremely little. Our rationale here is that even the net investment income is just about 2.5% of total assets. So going from that to 2.75% (adding 10% of 2.5%) is hardly a game changer. It also offers very little protection on the way down. Further, since the total is way below the distribution yield on NAV, it means the fund has to rely very heavily on capital appreciation to fund the distributions.

Verdict

The fund currently trades at a modest discount to NAV and that might draw in some of the bargain purchasers.

One must keep in mind though that this fund has almost always traded at a discount to NAV.

The longer-term strategy has not worked. Here we show IDA benchmarked against the Morningstar US CEF Covered Call Strategy funds and it has done far worse than the average fund.

Why? Well the two easy detractors to find are the technology underweight and the global nature of the fund. It's no secret that overseas markets have not done half as well as the US and the category above is made up primarily of US focused funds. Even income investors have likely been disappointed by the steady stream of cuts over time.

Some might argue that the yield 9.23% is really a great way to play defense today. We agree in part and think the fund is sticking to "value" at the right time. But imagine what your yield on cost would be if you bought in at the IPO. It would be down to 2.4% currently (48 cents on $20.00). That does not inspire confidence. At present we think the fund could still offer some alpha relative to SPY which consists of massive bloatware. But we cannot get behind this for a buy rating.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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