EVT: A Solid Fund For The Long Term

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Written by Nick Ackerman, co-produced by Stanford Chemist. This article was originally published to members of the CEF/ETF Income Laboratory on May 2nd, 2022.

Eaton Vance Tax-Advantaged Dividend Income Fund (NYSE:EVT) continues to trade at a small premium. This has been more common for the fund over the last few years. Going back further, it had traded at discounts quite regularly. That can make it a more difficult fund to try to add to one’s closed-end fund portfolio, as some investors have a “never premium” policy. Which isn’t the worst rule to have when it comes to CEFs. However, there are funds that regularly trade at premiums consistently, which can still be worth a look.

EVT is a little bit different when compared to most other “plain” equity type of funds. Instead of overweighting tech stocks and mirroring a more S&P 500 feel, they blaze their own trail by overweighting financial stocks. Historically, that has meant that they might not have provided the “market” beating returns that some investors seek. Some investors look solely for that, but I feel that financials might be in a better position for the foreseeable future as interest rates are rising.

The chart below shows a comparison between EVT and the S&P 500 SPDR (SPY) to provide the context of how the fund has performed relative to the market. The fund sponsor lists the Russell 1000 Value Index as its equity benchmark. Therefore, I included the iShares Russell 1000 Value ETF (IWD) as well.

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The Basics

  • 1-Year Z-score: 0.80
  • Premium: 1.49%
  • Distribution Yield: 7.52%
  • Expense Ratio: 1.10%
  • Leverage: 17.30%
  • Managed Assets: $2.559 billion
  • Structure: Perpetual

EVT has a focus on “dividend-paying common and preferred stocks and seeks to distribute a high level of dividend income that qualifies for favorable federal income tax treatment.” They also include a “value investment style and seek to invest in dividend-paying common stocks that have the potential for meaningful dividend growth.” The investment objective is to “provide a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation.”

They mostly invest in the U.S. but have a small allocation to international positions, primarily in Europe. To meet this tax-advantaged objective, they will primarily be using long-term capital gains and qualified dividend income to reduce the tax burden. This can make it more appropriate for a taxable account.

The fund is a considerable size for a CEF. This generally provides more liquidity for investors with a higher average daily trading volume.

Over the years, the fund has appreciated along with the market – despite being a regulated investment company that pays out most of its earnings – that is the primary reason why the leverage has come down over the years to a more moderate amount. In the last five years, they haven’t withdrawn any more than the $447 million they had throughout the whole period. As of August 28th, 2020, they had the capacity to borrow up to $524 million. However, they have restrained themselves thus far.

This can be a benefit as volatility has really kicked up into 2022. Having the spare capacity to add if stocks sink much deeper from here is great flexibility to have. Alternatively, just not being as leveraged as other funds can mean it holds up a bit better. That being said, any amount of leverage will add additional risks that wouldn’t otherwise be there.

Additionally, they pay 1-month LIBOR plus 0.50% on their borrowings. As interest rates rise, we will see these interest expenses rise as well. The fund’s expense ratio comes to a relatively low 1.10%. When including leverage expenses, it comes to 1.24%.

In 2019, when interest rates would have been at their highest in the last cycle, their total expense ratio with the inclusion of leverage was 1.95%. That can give us some idea of where interest rates could go. However, this latest cycle is expected to be more aggressive, with higher rates anticipated to temper inflation.

Performance – Strong Results

As we saw above, the fund has provided strong results on a total share price and NAV return basis over the last decade. It had underperformed relative to SPY but had outperformed its benchmark if we used IWD as an investable proxy. Keeping in mind that the market had been providing some strong results over the last decade, the leverage employed could be a direct result of why it performed better.

The fund hasn’t been just a solid performer over the last decade, though. The previous 1, 3, and 5 years all resulted in strong results for the fund. The data below is from the fund’s website and is based on the March 31st, 2022, closing.

EVT Annualized Performance (Eaton Vance)

Another factor that helped the fund out during that time was the fund was at a discount and is now trading at a premium. As we can see from the chart below, it was at around an 8% discount, and the latest closing puts it around a 1.49% premium.

EVT Discount/Premium (CEFData)

Distribution – Attractive 7.52% Yield

The fund has sunk in price since we last covered it, despite that pesky premium staying rather persistent. That has pushed the fund’s latest distribution yield to just above 7.5%, from the around 6.7% it had been in our previous update. On a NAV basis, this works out to a similar 7.63%.

EVT boosted its distribution just last year. Perhaps if they knew the market was about to face significant pressure in 2022, they wouldn’t have raised when they did. However, it still doesn’t seem as though they would have to trim their distribution just yet. However, Eaton Vance is often the first fund sponsor to do so.

EVT Distribution History (Seeking Alpha)

Historically, they only have cut once. That was during the 2008/09 GFC. It didn’t stop them from paying a monthly distribution, though, which they have done so since their inception.

The underlying portfolio provides for a fairly regular flow of dividends to the fund. That translates into some sizeable coverage from net investment income. NII is the figure that takes all the interest and dividends, then subtracts the fund’s expenses. It is essentially the income that is left over for shareholders.

EVT Annual Report (Eaton Vance)

From the Annual Report above, we can see that NII coverage comes in at 33.66%. This might seem rather low, but relatively speaking, isn’t unusual to see. It is actually quite rare for an equity-focused CEF to cover their distribution entirely from income. That is where capital gains come into play.

The distributions to shareholders will increase in the fiscal year we are currently in. This is because of the distribution boost that shareholders received. On top of this, since the fund trades at a premium, they get the opportunity to sell shares into the market. This is an at-the-market offering, and it can only be done when shares are at a premium. This is a win-win for both current shareholders and the management of the fund.

A greater number of assets due to selling more shares means that the distributions will increase. However, it also means the earnings on the fund should also increase as more is invested.

For tax purposes, the fund distributes out distributions commonly characterized as long-term capital gains. Then they also pay out ordinary dividends, but those are also tax-advantaged because they generally are considered qualified dividends. That was the case again in 2021.

2021 Tax Classifications (Eaton Vance)

This is where the “tax-advantaged” part of its name comes from. These are distributions that are generally taxed at reduced rates for investors.

EVT’s Portfolio

As I mentioned above, the fund often is overweight in financial positions. Unfortunately, they don’t regularly update the sector breakdown, so we have to go back to their Annual Report once again to see the allocations. That means going back to October 31st, 2021. Since it is an actively managed fund, these weightings could have changed significantly.

Some years the fund can be quite active as well. This is shown as portfolio turnover. In 2017, it was as high as 85%. Then it was also as low as 30%, which was in 2021.

EVT Sector Weightings (Eaton Vance)

That being said, EVT has been fairly consistent with overweighting financials for the last several years, at least.

Fortunately, the top ten holdings are updated more frequently. This provides us with a better perspective on the fund anyway, as it is the companies that will have the most impact on the fund’s performance. With this latest update, we don’t see any massive changes. The top ten represent 24.72% of the portfolio’s assets as of March 31st, 2022.

EVT Top Ten (Eaton Vance)

The last update we had done for EVT reflects the holdings as of October 31st, 2021. Since then, JPMorgan (JPM) has held onto its top position. However, the stock’s weighting has sunk from 4.27% to the current 3.53%. We also saw Bank of America (BAC) and Goldman Sachs (GS) in top positions in that previous report. These have now been replaced with ConocoPhillips (COP) and Chevron (CVX).

BAC and GS still maintain positions in the fund; it is just that they have sunk to 1.57% and 1.69% weightings, respectively. Previously, they were 2.23% and 2.22%, respectively.

If we take a look at the performance of these four stocks, we start to see a better picture of just what is going on. Given the performance over this six-month period, it is unsurprising to see COP and CVX pop up to larger weightings.

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CVX and COP had previously been positioned in the fund. Now that the performance has trended rapidly higher along with increasing energy prices. So, management wouldn’t have even had to actively add to these positions to see them take spots in the top ten.

Conclusion

EVT remains at a stubborn premium. However, that isn’t unusual for the fund over the last couple of years now. During 2020, the fund did present a discount, and that is when I ended up initiating a position. I added more in February of 2022 when I thought the fund was presenting a better valuation with the markets sinking. Since then, it has sunk a bit lower again as the broader markets are making new lows for the year. I believe over the long term, this fund will provide solid performance again, but perhaps being a bit more patient to add when at a discount again could be prudent.