2023-09-15 04:06:34 ET
Summary
- The Eaton Vance Tax-Advantaged Global Dividend Income Fund offers a high level of current income with a 7.41% yield.
- The fund has underperformed the S&P 500 Index and MSCI World Index over the past year.
- The fund's portfolio includes a mix of dividend-paying stocks, preferred stocks, and bonds, but some of its top holdings do not pay dividends.
- The fund's long-term performance is not too far off of the MSCI World Index, but it has a much higher yield, so it might be a reasonable alternative for income-seekers.
- The fund's valuation is very reasonable right now.
The Eaton Vance Tax-Advantaged Global Dividend Income Fund (ETG) is, as the name suggests, a closed-end fund that is designed to assist investors in earning a high level of current income from their portfolios. This is evident in the fund's current 7.41% yield, which is quite a bit higher than many other things in the market. Unfortunately, the fund has not been delivering the best performance recently, as its shares are down 6.95% over the past twelve months, which compares very poorly with the positive return that has been delivered by the S&P 500 Index ( SPY ):
With that said, the fund does claim to invest its assets globally instead of only domestically so the American stock market might not be the best index to compare it to. However, as I pointed out in my last article on the fund, a substantial proportion of the fund's holdings are American companies and many people think of the S&P 500 Index as being the index against which all funds should be benchmarked. We get the same underperformance if we compare the Eaton Vance fund against the MSCI World Index ( URTH ):
This alone does not necessarily mean that this is a bad fund to invest in. Indeed, it does have a substantially higher yield than either of these broad market indices so that alone may be appealing to some investors. The fund is also trading at a fairly substantial discount to its intrinsic value, so there could be some value appeal here.
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 Income Fund has the stated objective of providing its investors with a high level of after-tax total return. Unlike several other Eaton Vance funds though, this one does not provide a description of its strategy on the webpage. Fortunately, the fund's fact sheet does include some information regarding its strategy:
Fund Fact Sheet
According to this, the fund's strategy is basically to invest in undervalued dividend-paying stocks from around the world. The fund's portfolio generally supports this strategy as it currently has 87.34% of its assets invested in common stocks alongside positions in fixed-income securities such as preferred stocks and bonds:
CEF Connect
One of the advantages of preferred stocks and bonds is that they tend to have much higher yields than common stocks. We can see this by looking at the current yield of a few different stock and bond indices:
Index/Index Fund | Type | Current Yield |
S&P 500 Index | Common Stock | 1.46% |
MSCI World Index | Common Stock | 1.61% |
Bloomberg U.S. Aggregate Bond Index ( AGG ) | Bond | 3.02% |
ICE Exchange-Listed Preferred & Hybrid Securities Index ( PFF ) | Preferred Stock | 6.95% |
As we can clearly see, bonds and preferred stock will generally have higher yields than bonds on average. This does not necessarily mean that there are no dividend-paying stocks that have a higher yield than a given bond issue - there certainly are - but for the most part, preferred stock and bonds have higher yields than common stock. Thus, the presence of these securities in the fund's portfolio should boost its income compared to a portfolio that is comprised exclusively of common stock. This extra income can allow the fund to pay out a higher distribution to its shareholders than it otherwise could so it fits well with the fact that the fund's name implies that it can be a source of income.
As I pointed out in my previous article on this fund, the portfolio of the Eaton Vance Tax-Advantaged Global Dividend Income Fund is a bit strange for a fund that claims to be primarily investing in dividend-paying stocks. Here are the largest positions in the fund's portfolio today:
CEF Connect
We see a few stocks here that do not pay any dividends such as Alphabet ( GOOG ) and Amazon.com ( AMZN ). A few of the others have yields that are so low that they do not really matter:
Company | Current Yield |
Microsoft Corp ( MSFT ) | 0.81% |
Alphabet | N/A |
Amazon.com | N/A |
Apple ( AAPL ) | 0.55% |
Nestle ( OTCPK:NSRGY ) | 2.84% |
Coca-Cola ( KO ) | 3.15% |
ConocoPhillips ( COP ) | 1.67% |
GXO Logistics ( GXO ) | N/A |
Adobe (ADBE) | N/A |
Zoetis ( ZTS ) | 0.82% |
There are four companies here that pay no dividends. There are three more companies that have a yield of less than 1.0%. Thus, we have seven of the top ten holdings in a so-called dividend income fund paying basically no dividends. This certainly does not agree with the fund's statements in its own fact sheet that it invests primarily in dividend-paying stocks. This is actually a bit worse than the last time that we discussed this fund. Back in May, only five of the ten largest positions in the fund paid no dividends.
With that said though, we do see that the fund does appear to be more heavily weighting high-yielding sectors when compared to the MSCI World Index:
Fund Fact Sheet
We immediately see that the fund is overweight both financials and utilities when compared to the index. These are generally considered to be among the highest-yielding sectors in the global stock market. We also see that it is underweight technology stocks compared to the index. This also fits well with the dividend theme. After all, the information technology industry consists much more heavily of long-duration growth stocks than many other sectors. That also works pretty well, since as we just saw technology companies tend to have much lower yields than other sectors.
The one big complaint that I have here is that the fund is underweight in energy and especially materials. As I pointed out in a recent article , there is a very good case to be made right now for rising energy prices in the final quarter of 2023. There are also some reasons to expect that materials and other commodities will outperform given the very poor outlook for Federal government deficits in a high-interest rate environment. We also need to consider the enormous quantity of resources that will be required to achieve net-zero carbon emissions goals, batteries for both renewable energy and electric cars, and the general underinvestment in natural resource production over the past several years. All of these factors are pointing to rising resource prices going forward. The materials sector also tends to be one of the highest-yielding sectors of the economy, so it is very surprising that the fund is not investing more heavily here.
Another thing that we notice by looking at the largest positions in the fund is that it includes a few foreign companies. For example, Nestle is a Swiss food conglomerate that I am sure everyone reading this has either heard of or purchased products that it has produced. The fund's name also strongly implies that it is a global fund that invests in assets all over the world. We can quickly see that this is indeed the case when we look at the fund's entire portfolio. In fact, the United States only accounts for 49.84% of the fund's assets:
CEF Connect
The last time that we discussed this fund, the United States accounted for 42.48% of the fund's total assets so it has clearly increased its exposure to the United States. This is not entirely surprising as the United States has outperformed the rest of the world since May 4, 2023 (the last time that we discussed this fund). This chart shows the total return of the S&P 500 Index against the MSCI World Index from that date until September 14, 2023 (the day that this article was written):
As we can see, the S&P 500 Index outperformed the MSCI World Index, which means that the American component of the MSCI World Index delivered stronger returns than the rest of the planet over the period. Therefore, if the fund made no changes to its portfolio over the period, then the weighting assigned to the United States would still have increased over the past few months. This fund has a 59.00% annual turnover though, so it is hard to believe that it made no changes over the period.
Despite this increase in the American allocation, the fund's American exposure still remains below 50%. This is nice to see due to the fact that overexposure to the United States is one of the biggest problems faced by American investors. This was discussed in great detail in a previous article , so there is no need to repeat myself here. The fact that this fund has significant exposure to foreign assets is a good thing because adding it to a portfolio should reduce the overall exposure of the portfolio to the United States. This helps to protect against economic problems or other events that only affect the United States. That is a good thing from a risk management perspective.
In the introduction to this article, I pointed out that the Eaton Vance Tax-Advantaged Global Dividend Income Fund significantly underperformed the MSCI World Index over the past twelve months. However, it is important to note that the closed-end fund pays out a substantially higher yield than the index, which its price performance in the market did not take into account. With that said, it did underperform the MSCI World Index by quite a lot over the past year even when we consider the distribution differences. Here are the total returns of the two assets over the past year:
This is, to say the least, very disappointing. Fortunately, it is only one year. The Eaton Vance fund compares much more favorably to the index when we look at a longer time frame. For example, this chart shows the total return of the two assets over the past ten years:
As we can see, the Eaton Vance Tax-Advantaged Global Dividend Income Fund still underperformed the MSCI World Index, but not very much. In fact, the difference was only 5.97% over the full ten-year period. This does not mean 5.97% annually, it means that after ten years you would only have 5.97% less money with this fund than you would have had if you invested in the index. That might be a worthwhile tradeoff for someone who desires to earn a high level of income from their portfolio.
As is always the case, past performance is no guarantee of future results. However, we can see that this fund might be a worthwhile alternative to the MSCI World Index for someone who wants the higher yield that the Eaton Vance Fund offers.
Leverage
One of the characteristics of closed-end funds like the Eaton Vance Tax-Advantaged Global Dividend Income Fund is that they are able to employ certain strategies that have the effect of boosting their yields beyond that of any of the underlying assets. One of the strategies that is employed by this fund is leverage. I explained how this works in my last article on this fund:
"In short, the fund is borrowing money and then using that borrowed money to purchase domestic and foreign common and preferred stocks. As long as the purchased assets can provide a higher total return than the interest rate that the fund has to pay on the borrowed funds, the strategy works pretty well to boost the effective yield of the portfolio. Since this fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates, that will usually be the case.
However, the use of debt in this fashion is a double-edged sword. This is because leverage boosts both gains and losses. As such, we want to ensure that the fund does not employ too much leverage since that would expose us to too much risk. I do not usually like to see a fund's leverage exceed a third as a percentage of its assets for this reason."
As of the time of writing, the Eaton Vance Tax-Advantaged Global Dividend Income Fund has levered assets comprising 20.97% of its portfolio. This is a decrease from the leverage level that the fund had the last time that we discussed it, which is a positive sign. There are a lot of reasons why the fund's leverage might have decreased but regardless of the reason, it should now have somewhat lower risk than it did previously. Overall, the risk-reward tradeoff seems pretty good here.
Distribution Analysis
As mentioned earlier in this article, the primary objective of the Eaton Vance Tax-Advantaged Global Dividend Income Fund is to provide its investors with a high level of total return. In order to accomplish this, the fund invests in a portfolio of stocks that appears to be more weighted towards dividend-paying ones than the MSCI World Index. The fund also includes preferred stock and bonds to boost its income a bit compared to a pure common stock portfolio. It then adds a layer of leverage to boost the effective yield and overall total return of the portfolio. The fund collects all of the dividends and interest payments that it receives, as well as any capital gains that it obtains, and pays them out (net of the fund's expenses) to its shareholders in the form of a distribution. This might be expected to give the fund a fairly high yield, which is certainly the case. This fund pays a monthly distribution of $0.1001 per share ($1.2012 per share annually), which gives it a 7.41% yield at the current price. Unfortunately, this fund has not always been consistent with its distribution, although it has gotten very close:
As we can see, this fund was generally very consistent with its distribution from the time of the Great Recession to the latter stages of 2021 when an influx of money into the markets from all of the pandemic-era money printing resulted in a euphoria in the markets. The fund raised its distribution in response to all of the money that it was making but has since been forced to cut the payout now that monetary tightening has suppressed returns. The current distribution is lower than the fund had prior to the distribution increase, which is disappointing.
Overall, this may prove to be a turn-off to anyone seeking a safe and consistent source of income to use to pay their bills and finance their lifestyles. However, this fund actually has done a much better job at maintaining a consistent distribution than most other ones in the market. In addition, it is important to keep in mind that anyone purchasing the fund's shares today will receive the current distribution and the current yield and will not be affected by any actions that the fund has taken in the past. The most important thing is how well it can sustain the current distribution. Let us investigate this.
Fortunately, we do have a reasonably recent document that we can consult for the purpose of our analysis. The fund's most recent financial report corresponds to the six-month period that ended on April 30, 2023. This is a more recent report than the one that we had the last time that we discussed this fund, which is nice because the first few months of this year reflected a certain amount of market optimism and that may have enabled the fund to earn some capital gains. The fund barely managed to cover its distribution in the preceding full-year period so generating some strong gains would be very beneficial in helping it sustain the current payout.
During the six-month period, the Eaton Vance Tax-Advantaged Global Dividend Income Fund received a total of $32,371,668 in dividends and $5,150,957 in interest and other income from the assets in its portfolio. This gives the fund a total investment income of $37,522,625 during the six-month period. The fund paid its expenses out of this amount, which left it with $20,341,493 available to shareholders. That was, unfortunately, not nearly enough to cover the $45,921,249 that the fund actually paid out in distributions during the period. At first glance, this could be concerning as the fund did not have sufficient net investment income to cover its distributions.
However, the fund does have other methods that can be employed to obtain the money that it needs to cover its payout. For example, the market was very strong for much of the period in question, which could have allowed the fund to earn some respectable capital gains. Fortunately, the fund did have some success at this task during the period. It reported net realized losses of $22,355,570 but this was more than offset by $182,823,976 in net unrealized gains. Overall, the fund's net assets went up by $134,888,650 after accounting for all inflows and outflows during the period. Thus, while the fund did fail to fully cover its distribution out of net investment income plus net realized gains, the increase in assets still should result in the fund being able to sustain its distribution. For the most part, as long as a fund manages to increase its net assets during a period without relying on capital raises, we can be reasonably confident that its distribution is in good shape. That was the case with this fund during the most recent period.
Valuation
As of September 13, 2023 (the most recent date for which data is available as of the time of writing), the Eaton Vance Tax-Advantaged Global Dividend Income Fund has a net asset value of $18.24 per share. However, the shares only trade for $16.33 each. That gives the shares a 10.47% discount on net asset value at the current price. This is a very reasonable price to pay for the fund, and it is actually quite a bit better than the 9.49% discount that the shares have had on average over the past month. Overall, the price certainly appears to be reasonable today.
Conclusion
In conclusion, the Eaton Vance Tax-Advantaged Global Dividend Income Fund appears to be a very reasonable alternative to the MSCI World Index for an investor who is seeking a higher level of income than the index can provide. This fund is more heavily weighted to high-yielding sectors than the index but does not really sacrifice too much in terms of historical total return over the long term. The fund's largest positions all have fairly low yields, but the portfolio overall manages to deliver and the fact that more than half of its portfolio is invested in foreign companies allows it to add a significant amount of international diversity to the average American's portfolio. The fund also appears able to sustain its yield and it trades at an attractive valuation. Overall, an income investor might have a lot to appreciate here.
For further details see:
ETG: A Reasonable Alternative To The MSCI World Index With A Higher Yield