2023-04-26 14:46:52 ET
Summary
- Investors are in desperate need of income in order to maintain their lifestyles in the face of some of the highest inflation that we have seen in decades.
- Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund invests in a portfolio of dividend-paying common and preferred stocks issued by companies from around the world and pays out its returns to shareholders.
- The ETO closed-end fund is a bit more diversified than many other equity-income funds, which could prove to be an advantage if the market continues to be volatile.
- The fund cut its distribution back in November, but its finances appear to be in decent shape and it can probably maintain the current payout.
- The fund is currently trading at a very attractive valuation.
It is hardly an understatement to say that the biggest problem facing American households today is the incredibly high inflation rate that has been ravaging the economy. This has driven up the cost of many staple items, resulting in even McDonald’s Corporation ( MCD ) reporting that consumers have begun experiencing difficulty affording food. The high rate of inflation is quite well illustrated by the consumer price index, which has posted at least a 6% year-over-year increase in eleven of the past twelve months:
We do see that the inflation rate has been falling in recent months, but as I explained in a recent blog post , this is misleading because all of the improvement has been caused by moderation in energy prices. As there are some signs that energy prices may begin trending upward as we enter the summer months, we could very easily see the inflation rate shoot upward once again. This will apply additional pressure on people that have already been forced to seek out second jobs or enter the gig economy simply to make ends meet. In short, the current environment has many people desperate for any source of income that they can find.
As investors, we are certainly not immune to this. After all, we also need to have money coming in to pay our bills and finance our lifestyles. However, we have some other methods that we can employ to obtain this income. For example, we can put our money to work for us to earn said income. 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. These funds are, unfortunately, not very well followed in the investment media and most financial advisors are not familiar with them. This makes it hard to find information on these funds, which is unfortunate as they offer a number of advantages over open-ended mutual funds and exchange-traded funds. Most importantly, a closed-end fund has the ability to employ certain strategies that can boost its yield beyond that of any of the underlying assets.
In this article, we will discuss the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund ( ETO ). This fund yields an impressive 7.56% at the current level, which is certainly enough to allow any investor to generate an acceptable level of income. The fund also clearly beats the S&P 500 Index (SP500) and most other major indices in terms of yield, which likely is appealing to some readers. I have discussed this fund before, but a few months have passed since that time so naturally some things have changed. This article will focus specifically on those changes as well as provide an updated analysis of the fund’s financial condition. Let us investigate and see if this fund could be a good addition to 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 total return. This is hardly surprising considering that this is an equity fund. The fund’s fact sheet specifically states that in its description of the fund’s 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 confirms this focus on common and preferred equities, as these securities account for a total of 92.18% of the fund’s portfolio:
The reason that the emphasis on total return is not surprising in this light is that equities are by their very nature a total return instrument. After all, investors typically purchase common stocks with the goal of receiving income via the dividends that they pay out as well as the capital gains that usually accompany the growth and prosperity of the issuing company. As the dividend yield of the S&P 500 Index is only 1.59% as of the time of writing, it seems logical that one cannot depend solely on dividends for the total return as that would be a pretty terrible return. Thus, the fund’s strategy is to attempt to keep its own share price relatively stable while paying out all its investment income after expenses and its capital gains to its shareholders.
As is the case with most equity closed-end funds, this one failed in its task of maintaining a stable share price over the past year. In fact, the fund’s share price declined by a disappointing 17.50%:
This is certainly not unsurprising considering the market conditions over the time period. As everyone reading this is certainly well aware, the Federal Reserve abandoned its loose monetary policy back in March of 2022 and has been raising interest rates ever since. This is an attempt to reduce the rate of inflation that is causing havoc throughout the United States. It also had the side effect of popping the bubble in many assets, including stocks. With that said though, the S&P 500 Index is still trading at excessively high valuations but it is nowhere near as bad as it once was. We also saw declines in fixed-income assets, such as preferred stocks, as well as common stocks not in the S&P 500 Index over the trailing twelve-month period. Thus, it makes a great deal of sense that the fund would decline over the past year since the value of the assets that make up the fund declined.
Unfortunately, this fund failed to beat the S&P 500 Index in terms of total return. This is because it continued to pay out its distributions over the past year so investors would not have lost as much as the above chart indicates. Here are the fund’s performance figures as of December 31, 2022, assuming reinvestment of all distributions:
The market has rebounded this year, which offset some of the losses as well. Over the twelve-month period that ended on March 31, 2023, the fund’s portfolio returned –8.46%, which is significantly different from the –19.72% loss that an investor who reinvested the fund’s distributions would have actually seen reflected in their account:
That is not uncommon for a closed-end fund. The performance of the fund’s shares in the market can sometimes be vastly different than the performance of the fund’s actual portfolio. That can sometimes create opportunities in which an investor can purchase the fund’s assets for less than they are actually worth. We will discuss this later in this article.
As mentioned earlier in this article, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund claims to invest primarily in dividend-paying stocks from around the world. However, its portfolio certainly does not appear to match this philosophy. Here are the largest positions in the fund:
This fund shares the same flaw as most of Eaton Vance’s equity-income funds in that its largest positions consist of numerous companies that pay either no dividend or have a yield so small that it is basically meaningless. Here are the yields of the largest companies in the fund’s portfolio:
Company | Current Dividend Yield |
Microsoft ( MSFT ) | 0.99% |
Apple ( AAPL ) | 0.56% |
Alphabet ( GOOG ) | 0.00% |
Walt Disney Co. ( DIS ) | 0.00% |
Nestle SA ( NSRGF ) | 2.60% |
Coca-Cola ( KO ) | 2.88% |
Amazon.com ( AMZN ) | 0.00% |
Novo Nordisk A/S ( NVO ) | 1.40% |
ConocoPhillips ( COP ) | 2.00% |
Compass Group ( CMPGF ) | 1.50% |
In particular, note the exceptionally low yields of the major technology companies that account for a sizable presence in the fund’s portfolio. This is certainly not the type of thing that we would expect to find in a fund that bills itself as an equity-income fund. I will give it some credit though for including three foreign companies among the largest holdings in the portfolio. That is much more than most global funds accomplish.
As my long-time readers on the topic of closed-end funds are certainly well aware, I do not generally like to see any single position in a fund account for more than 5% of the fund’s portfolio. That is because this is approximately the point at which that asset begins to expose the portfolio to idiosyncratic risk. Idiosyncratic, or company-specific, is that risk that any asset possesses that is independent of the market as a whole. 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 eliminated. Thus, the concern is that some event may occur that causes the price of a given asset to decline when the market does not and if that asset accounts for too much of the portfolio, then it could end up dragging the entire fund down with it in such an event. Fortunately, it does not appear that we have to worry about that here as the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund does not have any asset that accounts for more than 5% of the portfolio. This is a bit better than several of Eaton Vance’s other closed-end funds and illustrates that this fund appears to be maintaining an appropriate level of diversification across its asset classes. We do want to keep an eye on it though as we do not want the fund’s allocation to Microsoft to go much higher than the present level.
There have been relatively few changes to the fund’s largest positions over the past few months. In fact, the only change is that EOG Resources ( EOG ) was removed and replaced with Walt Disney Co. There were also numerous weighting changes, but that could simply be caused by one stock outperforming another in the market and is not necessarily evidence of any trading activity on the part of the fund’s management. This could imply that the fund has a relatively low turnover rate. This is partly true as the fund had an annual turnover of 52.00% in 2022, which is about average for an equity closed-end fund. The reason that this is important is that it costs money to trade stocks or other assets, which is billed directly to the fund’s shareholders. This causes a drag on the fund’s performance and makes management’s job more difficult. After all, the management needs to generate a return that is sufficiently high to cover these expenses as well as have enough left over to give the shareholders a satisfactory return. That is a task that very few funds are able to accomplish on a consistent basis and typically results in actively managed funds failing to outperform their benchmark indices. As we saw earlier, this fund is generally underperforming the S&P 500 Index, but that is perhaps not a perfect comparison as the fund includes preferred stock and foreign companies that are not included in the index. The fund itself benchmarks against the MSCI World Index ( URTH ), but it has failed to beat this index as well. Here are the average annual return figures for the world index:
If we look back at the performance figures for the fund, we can see that it has underperformed the MSCI World Index by quite a bit. Thus, it appears that this one is no exception to the rule that actively-managed funds typically fail to beat their benchmark indices.
Leverage
Earlier in this article, I stated that closed-end funds like the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund have the ability to employ certain strategies that allow them to earn a higher yield than any of the underlying assets possess. One of these strategies is the use of leverage. In short, the fund borrows money and then uses that borrowed money to purchase common or preferred stocks. As long as the purchased asset has a higher total return than the interest rate that the fund has to pay on the borrowed money, this strategy works pretty well to boost the return of the fund. As the fund can pay out both dividend income and capital gains, this allows it to pay out more than it could without the borrowed money. This fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates. Thus, it will usually be the case that the strategy works pretty well.
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 is not employing too much leverage, as that would expose us to too much risk. I generally do not like to see a fund’s leverage exceed a third as a percentage of its assets for this reason. Fortunately, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund currently meets this requirement. As of the time of writing, the fund’s levered assets comprise 20.99% of the portfolio. Thus, it appears that this fund is currently maintaining a reasonable balance between risk and reward.
Distribution Analysis
As mentioned earlier in this article, the primary objective of the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is to provide its investors with a high level of total return, specifically by investing in assets that pay out dividends that are eligible for favorable federal income tax treatment. The fund also aims to pay out the majority of its capital gains, thus maintaining a relatively stable share price and providing investors with a high level of total return via direct payments. As such, we might assume that the fund boasts a reasonably high yield, particularly since it uses leverage to boost its overall returns. That is certainly the case as the fund pays a monthly distribution of $0.1374 per share ($1.6488 per share annually), which gives it a 7.56% yield at the current share price. The fund has generally been pretty reliable with its distribution over the years, although it did cut back in November of 2022:
The recent cut may prove to be a bit of a turn-off for those investors that are seeking a safe and secure source of income to use to pay their bills or finance their lifestyles. However, this is hardly the only closed-end fund that has had to cut its distribution in recent months. In fact, nearly all of Eaton Vance’s equity closed-end funds cut their payouts back in November, which is probably due to the fact that all of them are heavily invested in the mega-cap technology companies that significantly underperformed back in 2022. It is important to note though that any investor that purchases the fund’s shares today will receive the current distribution at the current yield. As such, the fund’s past is not necessarily the most important thing. The fund’s ability to sustain its distribution going forward is much more critical for any new investor. Therefore, let us have a look at the fund’s finances and attempt to determine how safe its distribution is.
Unfortunately, we do not have an especially recent report that we can consult for the purposes of our analysis. The fund’s most recent financial report corresponds to the full-year period that ended on October 31, 2022. This is the period that immediately preceded the fund’s distribution cut, so the report should give us some good insight into the cause of that. Unfortunately, it will not include any information from the past several months, which has seen a rebound in the market and likely resulted in the fund being able to generate some capital gains. We will have to wait until the fund releases its semi-annual report in a month or two to see how well it took advantage of the current strength, though.
During the full-year period in question, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund received $14,196,787 in dividends along with $3,758,447 in interest from the investments in its portfolio. When we combine this with a small amount of income from other sources, we see that the fund had a total investment income of $18,238,287 during the full-year period. The fund paid its expenses out of this amount, which left it with $11,376,445 available for shareholders. That was obviously nowhere close to enough to cover the $35,062,920 that the fund actually paid out in distributions during the period. At first glance, this is likely to be somewhat concerning as the fund had insufficient net investment income to cover its distributions.
However, the fund also pays out capital gains, which are not considered investment income for accounting purposes. As might be expected given the volatile market that was present throughout much of 2022 though, the fund failed somewhat miserably at this task. It did manage to achieve net realized gains of $23,260,173 but this was more than offset by $152,852,777 net unrealized losses. Overall, the fund’s assets declined by $143,367,137 over the period after accounting for all inflows and outflows. This is concerning, but the fund’s net investment income combined with its net realized gains totaled $34,636,618, which was pretty close to the amount needed to cover the distributions. The cut was probably intended as a precautionary measure since the choppy market and the decline in the fund’s asset base made it somewhat difficult for the fund’s managers to have confidence that they could generate sufficient returns to maintain the previous distribution. It does not really appear that the current one is going to be in any danger though, so another cut is unlikely.
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 suboptimal return on that asset. In the case of a closed-end fund like the Eaton Vance Tax-Advantaged 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 the fund’s assets minus any outstanding debt. This is therefore the amount that the fund’s shareholders would receive if it were completely 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 acquiring the fund’s assets for less than they are actually worth. This is, fortunately, the case with this fund today. As of April 25, 2023 (the most recent date for which data is available as of the time of writing), the fund had a net asset value of $23.66 per share but the shares only trade for $21.80 each. This gives the fund’s shares a discount of 7.86% at the current price. That is a reasonable price that is a bit better than the 6.79% discount that the shares have had on average over the past month. Thus, the price certainly appears right today.
Conclusion
In conclusion, the Eaton Vance Global Tax-Advantaged Dividend Opportunities Fund is a reasonable way to generate income from an equity portfolio. The fund offers a bit more diversification than many of Eaton Vance’s other equity-income funds, which is rather nice to see. In particular, this fund has somewhat lower exposure to the mega-cap technology companies that are still somewhat overvalued today. The fund also appears able to sustain its current 7.56% distribution yield, which is nice even though it is not as high as some other closed-end funds possess. The fact that it is trading at a discount to the net asset value is also good. Overall, this Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is probably a good choice for an income-focused investor.
For further details see:
ETO: This Attractively-Valued CEF Is A Good Choice For An Income Seeker