EOI For Steady Monthly Income

| About: Eaton Vance (EOI)

Summary

Eaton Vance Enhanced Equity Income Fund is a closed end fund and has a steady monthly income of $0.0864/month or 8.2%/year.

Total return is 11.50% more than the DOW average total return, over the last 39 month test period.

The Fund is 24.78.% in information technology companies 4% higher than the S&P 500 index the fund models.

Moderate downside protection and income from covered call writing on individual companies.

This article is about the Eaton Vance Enhanced Equity Income Fund (NYSE:EOI) for steady monthly income and a secondary goal of capital appreciation. The fund try's to model the S&P 500 index. The EOI fund invests in large Cap and Mid Cap companies that have above average growth and financial strength. Topics to be looked at are Yearly Income Percentage, Total Return And Discount, Company Allocation, Sector Distribution, Covered Calls, Distributions, and Takeaways.

Yearly Income percentage, Total Return And Discount

Being in retirement, my goal is to have a steady monthly income, without the swings of dividends that are paid on a quarterly or yearly basis. The EOI fund distribution of 8.2%/year ($0.0864/Month) return in today's low interest rate environment is fantastic and gives income investors a solid foundation.

I calculated the total return of EOI over a 39 month period starting with January 1, 2013 till the end of march 2016, 39 months in total. I chose this time frame since it included the great year of 2013, the moderate year of 2014, the losing year of 2015 and the slight up year of 2016 YTD. EOI Over performed the DOW average by 11.50%. For the 39 month period, the DOW total return was 35.78% and EOI beat that at 47.28% giving a good gain in addition to the income. The economy seems to be moving forward slowly which is good for EOI with its covered call approach to dampen the swings of the market and its high percentage of information technology companies.

EOI sells at a 6.98% discount to the NAV price. There are investors that like to play the discounts of CEF funds against each other, this is beyond my knowledge.

Company

Total Return for 39.0 Months

Difference from Dow Baseline

Yearly Distribution

EOI

47.28%

+11.50%

8.2%

DOW Baseline

35.78%

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Company Allocation

The Eaton Vance website gives a full list of the companies and percentage of each company in the fund portfolio for the latest quarter. The table below gives the top ten companies for the fund and their percentage in the fund portfolio. Using price chart data, I calculated the total return of the EOI top 10 companies out of 55 that the fund owns.

Company

Percentage

In Portfolio

Alphabet Inc. (NASDAQ:GOOG)

4.33%

Apple Inc. (NASDAQ:AAPL)

4.11%

General Electric (NYSE:GE)

3.36%

Amazon Inc. (NASDAQ:AMZN)

3.20%

Visa Inc. (NYSE:V)

3.17%

Watt Disney Co. (NYSE:DIS)

2.94%

Johnson & Johnson (NYSE:JNJ)

2.85%

JPMorgan Chase & Co. (NYSE:JPM)

2.62%

Danaher Corp. (NYSE:DHR)

2.59%

Corning Inc. (NYSE:GLW)

2.42%

Total

31.59%

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Source: Eaton Vance

All ten outperformed against the DOW average in total return of 35.78% over the 39 month test period. The total percentage for the top ten companies in the fund is shown at the bottom of the table. So overall the fund has large cap companies in its portfolio and is producing a total return above the DOW average over the 39 month test period. The fund has three companies GE, JNJ and DIS that are in The Good Business Portfolio.

Sector Distribution

Shown in the table below is a comparison of the S&P index percentage and fund percentage for the top five sectors in the fund. The fund is about 4% high in the technology sectors with the others close to the index.

Sector Name

S&P Percentage

Fund Percentage

Information Technology

20.69%

24.78%

Financials

16.47%

15.63%

Health Care

15.16%

14.73%

Consumer Discretionary

12.89%

13.98%

Industrials

10.05%

7.92%

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Covered Calls

EOI sells individual company covered calls against 48% of the portfolio value on individual companies with an average duration of 20 days and the percent out of the money of 5.9%. Covered calls provide EOI fund portfolio some downside risk protection and extra income to smooth out the normal market gyrations. The management in using covered calls, has the time to use covered call exit methods, if the market price goes against them. For EOI selling covered calls on the individual companies provides a steady income that does well in total return in a strong up market and gives some downside protection in weaker markets. In this volatile market the covered calls do not give enough protection to stop the fund price from taking a hit. If you want to learn about covered calls, I recommend the books written by Alan Ellman on the subject.

Distributions

Each month, the fund issues a statement saying which part of the distributions comes from short-term capital gains, long-term capital gains, investment income and return of capital. It is best to have EOI in a Tax deferred account to take advantage of the long term and short term capital gains nature of the fund. EOI distribution for December 2015 has the cumulative distributions for the year that was 8.9% investment income, 0.0% short-term capital gains, 0.0% long-term capital gains and 91.1% return of capital. This is not typical with return of capital being a significant part of the EOI distribution. Normally there are long term and short term capital gains in the distribution. The fund does really well in a strong up market and follows the market in an average market. The fund managers advise against drawing any performance conclusions from the distribution breakdown. They do manage the fund payouts to try and keep the monthly payment constant. The negative side of the return of capital in a taxable account is that it reduces your cost basis so that upon selling, you will have a larger long-term capital gain if held more than a year. For a full explanation of return of capital, please refer to the article written by Douglas Albo (CEFs and Return of Capital: Is It as Bad as It Sounds?).

TakeAways

EOI is a good income vehicle in a tax-deferred account. It gives a high monthly distribution which is steady and over performs the DOW averages over the test period of 39 months. EOI is a fair complement to individual company positions. EOI follows the market in an average market and does really well in a strong up market. EOI provides steady income, with fund price muted both on the upside and down side swings by the covered calls.

I wrote an article on the Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV) a couple of weeks ago and ETV has a 4% better performance than EOI. EOI has about equal distribution percentage compared to ETV. ETV being tax friendly should be used in a taxable account while EOI is better in tax deferred account. ETV market price is at a 4.4% premium while EOI is at a discount of 6.98%. Since both beat the DOW average both can be bought for steady income.

ETV is not part of The Good Business Portfolio that I usually write about (see my article on 2015 fourth-quarter performance for the complete portfolio list), but is held in a small Taxable account I have. I am long ETV.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long ETV, GE, DIS, JNJ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.