Can Eaton Vance's Tax-Advantaged Dividend Fund Sustain Its Yield?

WSJ was out recommending Eaton Vance (EVT) yesterday as it pays a 7% dividend and trades at discount on NAV because of ARPS issues, but I have my reservations.

This is an equity closed-ended fund. None of the big stocks that this fund owns has a 7% yield. So the only way the fund is able to pay out the high cash dividend is through the use of leverage, or auction rate preferred shares. Unless the fund can figure out a way to replicate the low-cost leverage that it has so far used, it will be difficult to sustain the level of dividend payments.

Eaton Vance mentions that is has replaced ARPS with debt for this fund, which will surely have higher cost than ARPS. I wouldn't be surprised if leverage goes down for this fund, which will also reduce its dividend, which is perhaps the only reason to buy this fund.

Capital gains with this fund will be correlated to the stock market. As shown in the literature on the website, this fund has always traded at a discount to its NAV, which can fall if underlying securities fall in price. If that happens, debt holders can force the fund to liquidate - akin to a margin call. Probably debt closed-end funds facing ARPS issues are better than equity closed-end funds.

This gave me an idea - is there a way I can borrow money at low cost and invest in high-dividend yielding stocks to profit from the spread?

Comments

[Jon A]

This is poorly researched and factually incorrect on more than one point. First off, this fund is not leveraged, and does not employ the use of leverage or "auction rate securities".

Second, this would not be the only way the fund can sustain such a high dividend. This fund is a covered-call strategy fund, which simply means that the fund managers sell covered calls against a portion of the funds assets, collecting the premium. This premium income, along with dividends paid by stocks in the fund sustain the dividend.

Please do some homework before you post things like this, as the misinformation and misunderstanding does not help an already complex world of investment choices.

[Gaurav]

From Page 2 of the Annual Report of this fund:

"As of August 31, 2007, the Fund's $700 million
issued and outstanding Auction Preferred Shares
(APS) equaled approximately 24% of total assets and
maintained a weighted average reset period of 21
days, which is comparable to what it was when the
Fund's leverage was originally issued. Use of financial
leverage creates an opportunity for increased capital
appreciation and income but, at the same time, creates
special risks (including the likelihood of greater
volatility of net asset value and market price of the
common shares). In the event of a rise in long-term
interest rates, the value of the Fund's portfolio could
decline, which would reduce the asset coverage for
its APS."

I dont find anything on the covered call strategy in the report. Rather, they use a approach called dividend capture strategy - which is basically trading to capture dividends.

[George Sears]

You have to love dividend and debt funds that use debt to increase yields. Why not have a fund that buys leveraged debt funds, and uses debt to leverage even more? Then a fund that buys these funds and... People wonder why we have a debt crisis.

In fact the basic premise of the WSJ column was that people don't save and have too much debt. So they should save by, drum roll, buying a fund that creates even more debt.

[Chamois16]

Lots of bad info here. EVT is a dividend capture fund, the additional dividends providing the extra yield. It doesn't do options. It is a levered fund along with its cohorts ETG and ETO which just switched to bankd debt from APS. There is no reason tp believe that this will cost significantly more than default APS rates resulting from failed auctions. Many CEF use debt rather than preferred shares, even before the APS problem. EVT distributions to date are entirely from earned invested income and are 15% qdi

The original poster apparently missed the capture strategy and subsequent posters have confused EVT with other funds

[Chamois16]

Correction to the above. The distributions are from investment income, not ROC or capital gains.

[Taylor]

Have been looking at open ended Eadix.

Much higher rate of income growth per share, and w/no leverage whatsoever:

finance.yahoo.com/q/hp...

[five whys]

EVT is dividend capture fund and ETV (intechange the letters!) is a buy-write fund which offers high dividend (11%+ currently) primarily thanks to call writing income.