Douglas Albo
submits:
Eaton Vance's Tax-Advantaged Global Dividend Opportunities
Fund (
ETO
)
has been far and away one of the best performing equity-based
high-yielding Closed-End Funds (CEFs) not just from the market lows
in early 2009 but also since inception from April of 2004. In fact,
ETO's
current 2-year high NAV price of $24.39 is so significantly above
its inception NAV of $19.10 once again that its current NAV yield
is now down to 5.74%, lower than its inception yield of 6.28%.
I believe that even if
ETO's
primary source of NAV growth has come from pure portfolio
appreciation more so than increased investment income from
dividends and interest, the portfolio appreciation still warrants a
dividend increase since
ETO's
market price will have a difficult time appreciating much more once
the current yield, now at 6.3%, gets closer to 6%.
I believe a 15%-25% increase in the annual dividend, perhaps in
gradual installments like Eaton Vance has done in the past, will
bring
ETO's
yield more in line with Eaton Vance's other two leveraged
equity-based high-yielding CEFs; both of which yield in the 7.25%
to 8.1% range currently. I cannot think of a better reward for a
fund that clearly deserves it.
First the tale of the tape:
Eaton Vance Tax-Advantaged Global Dividend Opportunities
fund (
ETO
)
- Inception Date: April 30, 2004
- Inception NAV: $19.10
- Inception Yield:
6.28%
- Current NAV 4/6/2011: $24.39
- Current NAV Yield: 5.74%
- Current Price 4/6/2011: $22.23
- Current Price Yield:
6.3%
- Dividend Pay Cycle: Monthly
- Premium/Discount:
-8.86%
- Current Net Assets: $354M
- Current Leveraged Assets: $466M
- Current Leveraged %: 24%
ETO
is one of three Eaton Vance leveraged, equity-based, high-yielding
CEFs offering tax-advantaged dividends to investors, the other two
funds being the
Tax-Advantaged Global Dividend Income Fund (
ETG
)
and the
Tax-Advantaged Dividend Income Fund (
EVT
).
If you have read my previous articles on Seeking Alpha, then you
know that a leveraged strategy is one of three primary strategies
that equity-based, high-yielding CEFs utilize to generate high
dividend and interest income that the fund passes on to investors
as high-yielding, tax-advantaged dividends. Tax-advantaged means t
he fund seeks to distribute a high level of dividend income that
qualifies for favorable federal income tax treatment.
Leveraged CEFs generally own a portfolio of domestic or global,
large cap yield-oriented stocks as well as a percentage of
fixed-income securities that just increases the amount of income
from the leveraged positions. The fixed-income portion helps
diversify the portfolio and bring some stability to a strategy that
is inherently volatile due to its leverage. Even with this balanced
portfolio however, leveraged CEFs can grow their NAVs faster than
their correlated pure equity indexes during a bull market cycle but
will see their NAV depreciate at a quicker pace in a bear market
cycle. Interest rates and interest rate direction can also have an
effect on leveraged funds due to their fixed income securities.
In the case of
ETO
, 98% of the net assets are invested in global stocks, 22.3% are
invested in preferred stocks and 7.5% are invested in corporate
bonds. Percentages add up to over 100% due to the leverage. The
fund's top 10 holdings and sectors are shown below, which I only
list for information purposes since frankly, in an up- market cycle
such as we've seen, the leverage becomes the primary driver for
performance more so than the selection of holdings, which are
mostly well-known large cap global names. The preferred stock
holdings have also been a significant contributor to the fund's
performance over the last two years as well.
Click to enlarge
:
Over the past fiscal year through October, 2010,
ETO
has been able to solidly outperform its benchmark averages. Though
comparisons with non-leveraged benchmark averages is difficult, in
ETO's
most recent annual report dated October 30, 2010, Eaton Vance
writes:
For the fiscal year ending October 31, 2010, the Fund's return
at Net Asset Value outperformed that of its benchmark, the MSCI
World Index (the Index), as well as the average return of its
Lipper Global Funds peer group.
Going back even further,
ETO
looks even more impressive. Since the market low of March 9, 2009,
ETO's
NAV has had a total return of 132% and since inception 89.2%. These
percentages include dividends added back, but not reinvested. These
are among the best of all equity based CE's and yet
ETO's
market price has been even better.
Since the market lows,
ETO's
market price has risen 150%, far outperforming the S&P 500
which has in essence doubled since the market lows. These
percentage returns shown below (
click to enlarge
), do NOT include dividends added back which would have made
ETO's
outperformance on a market price basis even more impressive. This
is what the power of leverage can do even with a balanced
portfolio.
I am predicting a dividend raise from $0.1167 to around
$0.13-$0.14 per share as early as the next declaration--around the
third week of April or possibly during the May declaration. This
would partially return the dividend level from a 35% cut that
occurred on December 22, 2008 during the market fallout.
ETO
is on a monthly-pay dividend cycle which is also attractive. I
would certainly expect a raise by the end of the year if the market
continues its upward momentum.
The reason why I am predicting a dividend raise mid-year is that
3 out of the 7 dividend raises Eaton Vance announced for these
funds during the 2004 to 2007 up-market cycle were during the March
to April time frame, so this would not be without precedent.
Click to enlarge:
Eaton Vance's usual declaration style would be to raise dividends
on all three of their leveraged funds
ETO, ETG
and
EVT
at the same time, but that might not be the case this go-around due
to the wide discrepancy in NAV levels as well as the wide
difference in yields.
ETG
would be the least likely to receive an increase due to its lower
NAV price and higher current yield at 8.1%, well above its target
inception yield of 6.47%. Even though
ETO's
current NAV yield of 5.74% is not that much lower than its
inception yield of 6.28%, it should be noted that Eaton Vance went
through a series of quick smaller dividend raises, 2 per year
during 2004 to 2006 so we could see another start to a dividend
raise cycle even if it starts with a small percent increase.
Eaton Vance has taken a lot of flak over the past several months
due to a second round of dividend cuts on their option-income funds
in December and a poor performance ranking from a major financial
news publication for all of their funds in February. The fact that
Eaton Vance has more option-income funds than any other fund
family, eight at last count, may have contributed to this poor
ranking so I believe Eaton Vance will try and re-focus attention on
some of their funds that are outperforming by raising the dividend
on their leveraged CEFs, starting with
ETO
.
Eaton Vance's three leveraged equity-based funds have had some
of the best performances of any closed-end, ETF or mutual fund over
the past few years, so it should not be a surprise to see the start
of dividend raises. We should find out by late next week.
Disclosure:
I am long
ETO
,
ETG
.
See also
Major Market Downturn Not Near, According to ETF
Pair Ratios
on seekingalpha.com