Summary
- I've recently reviewed four high-yield CEFs and given them sell ratings.
- In this article, I cover another CEF, ETO, which I rate as a hold and would suggest is a better CEF than any of the four I've just covered.
- Historical data backs this up as ten-year total returns for ETO have meaningfully outperformed GDV, OXLC, CRF, and CLM.
Lately, I’ve been reviewing a number of closed-end funds with high dividend yields and suggesting that folks sell those positions. Here’s a list of those articles and recommendations over the last month just as a recap.
Article Title | Rating | Ticker |
Oxford Lane Capital: Despite CLO Outperformance, It Eats Capital | Sell | |
Sell | ||
Strong Sell | ||
Cornerstone Strategic Value Fund: Expect A 2023 Distribution Cut | Strong Sell |
There have been hundreds of comments across the articles which I've been grateful for and believe they have provided conversation spaces for people to dig in further. A common theme I saw is the question of “ what’s the alternative if you’re recommending a sell? ”
Well today we are reviewing one more high-yield CEF. While I rate the stock a hold overall, I think it is a better option than any of the above CEFs.
A Review of the Fund
Eaton Vance Global Dividend Opportunities Fund ( ETO ) is a closed end fund with a global multi-asset focus. Here’s a screenshot with the high-level details for ETO and a couple of its sibling Eaton Vance funds.
ETO Investor Information: General Fund Data
Around 82% of the fund is invested in equities, 7.75% in mostly BB-rated corporate bonds, and 5.76% in preferreds.
CEF Connect: ETO Asset Allocation
The bond and preferred components of the portfolio help to support the fund’s $2.15 in annual distributions . At a current ETO stock price of $20.79 that implies an annual dividend yield of 10.34%.
The majority of the fund’s equity positions are based in the US at nearly 49% of their allocation. Second to that is a focus on European equities. Of note is that this fund has consistently outperformed global equity ETFs. Even comparing to Vanguard’s low-cost Total World Stock Index Fund ETF ( VT ) we can see that ETO total returns outperformed despite higher fees.
Seeking Alpha: ETO, VT, S&P500 Ten-Year Total Return Chart
These results just barely lagged the S&P 500 over the ten-year time frame. What this suggests to me is that management is earning their fees here through superior portfolio construction and stock picking.
In three of the CEFs I’ve reviewed so far, there is a long-term trend of net asset value ((NAV)) destruction. With ETO that is not the case. Inception NAV in 2004 was $19.10 as compared to NAV of $20.61 reported as of October 14th . What this shows is that the total returns being generated through the fund are not eroding the capital base. And in fact, management has expanded the capital base over the years while maintaining dividends and returns for investors.
If we look a little closer at their specific positions, we can see that their top twenty positions make up nearly 45% of their portfolio. All of these are large cap companies which seem likely to weather a recession.
Company [data as of 8.31.22] | % of net Assets |
Alphabet Inc - CL C | 5.19% |
Microsoft Corp | 5.05% |
Apple Inc | 3.39% |
Amazon.com Inc | 3.21% |
Coca-Cola Co | 2.54% |
Nestle SA | 2.48% |
Eli Lilly & Co | 2.02% |
Walt Disney Co | 1.96% |
EOG Resources Inc | 1.91% |
ASML Holding NV | 1.86% |
Mondelez International Inc | 1.81% |
Novo Nordisk A/S | 1.73% |
LVMH Moet Hennessy Louis Vuitton SE | 1.65% |
Boston Scientific Corp | 1.63% |
Compass Group PLC | 1.62% |
Elevance Health Inc | 1.49% |
Diageo PLC | 1.47% |
Danaher Corp | 1.36% |
TJX Cos Inc | 1.31% |
Visa Inc | 1.31% |
total | 44.99% |
We can also observe that the fund is overweight in Financials (22.33%) compared to the MSCI World Index (13.56%). With interest rates rising globally, being overweight in financials seems like an appropriate strategic choice.
ETO Fund Fact Sheet: Sector Allocation
ETO Passes the First Hurdle, But How’s the Dividend?
With OXLC, CRF, and CLM a major component of my sell thesis centered on the long-term trend of eroding NAV for each of these. This matters because in the case of declining NAV investors may see their capital returned to them directly via distributions. When distributions are consistently made that are return of capital ((ROC)) then an investor is merely seeing their money returned to them. This is never a recipe for returns.
We can see already that ETO is in a different category than those three, given they have actually grown NAV over time. Even though it's just a slight amount, it demonstrates that the company is not eroding capital while paying out distributions.
With that said, let’s look more closely at ETO’s distribution history and coverage to see if there is risk here. Their most recent shareholder report provides this table.
From this we can glean that over the last five years the company’s income from operations has completely covered the distribution 60% of the time. That means that in other cases capital gains will need to be used to cover the distribution. A lot of this is dependent on the company’s mark-to-market net realized and unrealized gains or losses. Over the years you can see that this fluctuates significantly, but what’s most important is that NAV is preserved while distributions are made.
Looking over the long term we can see that the distribution has been relatively stable since inception. Long term NAV growth coupled with a stable distribution seems like a much better income vehicle than the funds I have been reviewing.
To me this all reads as the fund should be able to maintain their distribution as it is for the near term. This may be pressured if we see a protracted bear market over the next year or two, but otherwise it seems relatively stable. Management can weather the downturn by selling out of positions to fund the distribution if needed. They can also raise money at the market when the stock is trading above premium.
The current yield of 10.62% likely comes with a bit of volatility over the near term as markets continue their chaos. But I think the fund’s historical performance and current allocation suggest that they should be able to navigate this upcoming cycle.
Compared to Recently Covered CEFs
From my perspective, ETO is already a better CEF option than three out of the four CEFs I’ve reviewed recently just based on the reality that they are not eroding the NAV base. One can look at historical total returns for comparison as well.
Seeking Alpha: ETO, GDV, OXLC, CRF, and CLM 10-year Total Return Chart
From this, we can see that ETO was the best performer by a significant margin. The three funds with declining NAV (CRF, CLM, and OXLC) are unsurprisingly the worst performers. The Gabelli fund ((GDV)) performs reasonably, but still not as well as ETO.
Here’s a table of some comparative data across these five CEFs.
10-year total return | Current Annual Dividend Yield | Expense Ratio | Premium/Discount NAV | 5-year Average Premium/Discount | |
ETO | 154.29% | 10.62% | 1.29% | 0.87% | 0.29% |
GDV | 120.95% | 7.08% | 1.28% | -14.41% | -9.89% |
OXLC | 68.42% | 17.93% | 12.14% | -6.84% | 17.05% |
CRF | 83.90% | 27.31% | 1.15% | 20.58% | 18.35% |
CLM | 78.50% | 27.39% | 1.12% | 19.35% | 16.91% |
Average | 101.21% | 18.07% | 3.40% | 3.91% | 8.54% |
Standard Deviation | 35.70% | 9.33% | 4.89% | 15.63% | 12.71% |
We can see that the outperformance of ETO is done with a relatively low expense ratio. This is a good thing. In my article on the Gabelli CEF , I highlighted two valuable pieces of research which can help to inform CEF choices. The key data points are:
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A 2012 Seeking Alpha article reviewed the entire CEF universe and found that expense ratios are not correlated to size or performance.
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Morningstar data over a ten-year period showed that the best indicator of open-end fund performance is their expense ratio.
The first point suggests that it pays to be skeptical of funds with high expense ratios. The second point reinforces the first in a tangential way – by showing that low expense ratios are strongly correlated to higher returns. As I mentioned above earlier, I’d say that management is earning their 1.29% expense ratio fee through their outperformance.
Conclusion and Opinion on ETO
I understand that some investors rely on monthly income to help maintain their lifestyle. I believe that ETO offers a better way to accrue monthly income than any of the four CEFs I’ve covered in the last month. It looks as if the distribution could be maintained at current levels even through a recession and long-term capital erosion is not happening in the fund. Both of these allow investors to rest well while ensuring monthly income.
I do note that ETO is currently trading slightly above its 5-year average premium to NAV. What this suggests to me is that waiting a bit for a greater discount to open a position may be prudent. But for those investors in the other funds, I’ve covered that have asked what is a better option, ETO is a place to start. And dollar cost averaging into a position one wants to open is never a bad approach.
For further details see:
A CEF Earning Its Distribution: ETO