- BDJ has provided investors with an attractive return this year due to discount reduction.
- The fund pays an appealing ~6% distribution yield, while not the highest available, it is certainly sustainable.
- Today the shares could be picked up for an initial position and remain attractively priced relative to the rest of the CEF space.
- This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »
Written by Nick Ackerman, co-produced by Stanford Chemist
BlackRock Enhanced Equity Dividend Trust (NYSE:BDJ) is one fund that I have quite a large position in. The fund's share price was quite busy this year, catching up rapidly to its net asset value price. Of course, that means in the closed-end fund world, the deep and attractive discount that the fund did have has been reduced. In the case of BDJ, the discount has been reduced quite substantially since the end of last year and the start of this year. The fund is attractive for its distribution yield but not quite as strong of a play that I had touted it as to start off 2021.
BDJ has a primary objective to "provide current income and current gains." The fund intends to achieve this by "investing in common stocks that pay dividends and have the potential for capital appreciation."
They will also utilize an option strategy on single stocks within the portfolio to "enhance distributions paid to the Trust's shareholders." The fund last reported being overwritten by 49.70%. This is quite a substantial portion of their portfolio and can help explain why they will lag during sharp upward market rallies.
They concentrate on dividend-paying stocks with "80% of its total assets in dividend-paying equities." They continue to remain overweight financials which is attractive, in my opinion.
The portfolio is quite sizeable, with over $1.911 billion in total managed assets. For most investors, buying and selling are not a problem as it provides plenty of liquidity. The expense ratio for BDJ comes to 0.86%, definitely on the lower end in the CEF space.
Performance - Discount Dissipating
The significant outperformance in the fund's share price this year has meant that the discount has evaporated quickly. However, it has pulled back a bit more after nearly touching a premium. More broadly, BDJ had pulled back in June and has been trending mostly sideways since then.
That sideways action has played out in the fund's discount. That has also remained quite close to the 2% mark now for several months. With some volatility opening up in September, we've seen some downward pressure for BDJ recently too. That pressure has increased BDJ's discount a bit to the current 3.78%.
Over the longer term, the fund has put up respectable results. They aren't as focused on tech. That has made them lag other covered call writing funds if we were to compare.
(Source - Fund Website)
I believe the fund is still quite attractive here as a hold, one could even nibble a bit to start an initial position, but I wouldn't necessarily be aggressively buying. Perhaps if September's slump picks up steam and we get more volatility, more patient investors could be rewarded.
CEFs across the board remain overly tight relative to their historical discounts. We have quite a ways to go before getting back to much more attractive levels. On that basis, BDJ could be a bit of a bargain still.
This also represents BDJ's situation, as the fund's 10-year average discount comes to a startling 9.51%. Over the last 1-year period, the average was still a materially wider 7.20% discount.
Distribution - Attractive ~6% Discount
The fund currently sports a 6.12% distribution yield. On a NAV basis, this comes to a reasonable 5.87%. Going back to the fund's inception in 2005, they have implemented some cuts. This happened primarily through and after 2008/09 for obvious reasons.
In hindsight, launching in 2005 wasn't ideal. They have yet to achieve those pre-financial crisis levels. I suspect that they may never get back to that inception price of $15. Though as we highlighted above, total returns are still attractive despite that fact. One of the things that are frequently the case with CEFs; they show attractive total returns due to high distributions while share price remains flat or goes down.
They launched with a monthly distribution, switched it to quarterly, and then returned to the more attractive monthly schedule. Switching to a monthly schedule can be seen as an attempt to reduce a CEF's discount as income investors find the greater frequency easier to budget on.
(Source - CEFConnect)
For covering their distribution, they will primarily rely on capital appreciation in their underlying portfolio. Since they carry a meaningful allocation to dividend payers, they also have a material portion of net investment income [NII] coming in as well to fund the distribution. NII coverage comes in at 26.3%.
(Source - CEFConnect)
As we can see, this year, they have more than enough to fund their distribution. In fact, based on these figures, the NII and capital gains realized so far in the first half of 2021 were enough to fund the distribution through the remainder of the year.
If they realize another significant portion of gains throughout the remainder of the year, it could suggest a year-end could be needed. Of course, they could offset this by realizing losses instead; that would also keep them in compliance with being a registered investment company [RIC].
On a tax basis, the fund's distribution breakdown is about as expected. It is all classified as qualified or long-term capital gains. This can make it an okay fit in a taxable account if your tax-sheltered accounts are already being fully utilized.
(Source - BlackRock Tax Center)
Holdings - Some Small Changes
Overall, the fund's holdings haven't changed significantly since we last covered the fund earlier this year. That is despite the fairly active portfolio turnover they reported at 21% for the 6-month period.
Financial exposure accounts for 27.14%, healthcare at 18.83% and tech at 11.40%. That compares to 27.01%, 18.28% and 10.87% reported at the end of June 30th, 2021.
I continue to remain optimistic about the financial sector. The stocks there continue to remain undervalued and stand to benefit in a rising rate environment. Inflation is being much more persistent than the Fed originally felt that it would be.
That being said, the labor market throwing out a weak report clouds what the Fed could do next. They had previously appeared to be set to taper their bond purchases. That could mean that interest rate increases also get pushed out if the economy slows down again.
(Source - Fund Website)
For the top holdings in BDJ's portfolio, Wells Fargo (WFC) remains in the number one spot. It only decreased its weighting by a whopping 1 basis point from the 3.69% that was previously reported. Citigroup (C) remains the second-largest position for the fund. Of course, both of these positions representing some of the financial exposure that we see listed above.
(Source - Fund Website)
There were a couple of new positions in this top ten list. That includes BAE Systems (OTCPK:BAESY) and Unilever (UL). Both of these positions were previously held, but due to normal market gyrations, it appears to have crept up these names to larger holdings.
BAESY is an OTC stock that trades on the pink sheets. They are located in the United Kingdom and "provides defense, aerospace, and security solutions worldwide." This might not be the type of position that I could see myself holding personally, but they seem to have a trend of rising dividends. They appear to be the more typical European-style dividend payer with semiannual dividends that vary.
(Source - BAESY Seeking Alpha)
Speaking of European companies, that is also where UL is based. They, of course, sell consumer staple products all over the globe and probably don't need a lot of introduction. Interestingly, they pay a regular quarterly dividend that is more similar to U.S. companies. While U.S. investors might see "varied" payouts, it is due to currency fluctuations. Otherwise, they have been paying an increasing dividend over the years at a level rate.
For U.S. investors, we can still see an upward trend as well. It just isn't as clear that they are a dividend grower. In 2010 they paid an annual dividend of $1.1148 to U.S. investors. In 2020, that worked out to $1.8501, translating to a growth of around 66%. This year the stock is on track to pay out even more.
(Source - UL Seeking Alpha)
BDJ isn't quite the bargain it was late last year or the beginning of this year. That being said, I certainly don't see it as a sell at this level either. Further, relative to the rest of the CEF space, BDJ could be considered a bit of a bargain. I just don't suspect we will see too much more in discount contraction from here. If we do see shares enter premium territory, that could be an indication to sell potentially. The last time the fund traded at a premium was going back to 2011. However, with increased volatility, we could see another buying opportunity open up.
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This article was written by
Nick Ackerman is a former financial advisor using his experience to provide coverage on closed-end funds and exchange-traded funds. Nick has previously held Series 7 and Series 66 licenses and has been investing personally for over 14 years.
He contributes to the investing group CEF/ETF Income Laboratory along with leader Stanford Chemist, and Juan de la Hoz and Dividend Seeker. They help members benefit from income and arbitrage strategies in CEFs and ETFs by providing expert-level research. The service includes: managed portfolios targeting safe 8%+ yields, actionable income and arbitrage recommendations, in-depth analysis of CEFs and ETFs, and a friendly community of over a thousand members looking for the best income ideas. These are geared towards both active and passive investors. The vast majority of their holdings are also monthly-payers, which is great for faster compounding as well as smoothing income streams. Learn More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BDJ either through stock ownership, options, or other derivatives. 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.
This article was originally published to members of the CEF/ETF Income Laboratory on September 18th, 2021.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.