For quite some time now, one of the biggest problems facing investors has been an inability to derive any sort of income off of the assets in their portfolios. This is an especially big problem for retirees since they are highly dependent on their portfolios to pay their bills and finance their lifestyles. The cause of this problem is the policies that have been pursued by the Federal Reserve over the past several years and unfortunately it does not appear that this will change any time soon. Fortunately, there are some ways around this problem. One of the best of the ways around this issue is to purchase shares of a closed-end fund that is focused on income. These entities are capable of providing investors with a diversified portfolio of incoming-producing assets that can in many cases generate a higher yield than almost anything else in the market. In this article, we will look at one of these funds, the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (NYSE:ETO), which currently yields an impressive 6.79% as of the time of writing. I have discussed this fund before but many months have passed so obviously a few things have changed. As such, this article will focus specifically on these changes as well as provide an updated analysis of the fund’s finances.
According to the fund’s web page, the Eaton Vance Global Dividend Opportunities Fund has the stated objective of providing its investors with a high level of after-tax total return. This is certainly not a unique objective as most equity funds state something similar. As the name of the fund implies, the fund aims to achieve its objective by investing in dividend-paying stocks issued by companies located all over the world. This focus on investing in dividend-paying stocks is a very common one used by investors, which makes a great deal of sense since it allows for both income and growth as the underlying companies grow and prosper. The fund’s focus on investing in global stocks is also rather appealing as it provides investors with a bit of protection against an increasingly overvalued American market.
We can see this global focus by looking at the largest positions in the fund. Here they are:
Source: Eaton Vance
As I noted in my previous article on the fund, a few of these positions are rather surprising to see in a global dividend fund. This is due to the fact that several of the major technology firms do not actually pay a dividend. In particular, we see fairly large weightings to Alphabet (GOOG), Amazon (AMZN), and Facebook (FB), which do not have dividends. Although Microsoft (MSFT) and Apple (AAPL) do have dividends, their yields are so low as to not matter. As such, the presence of these companies serves as a drag on the income of the overall portfolio. It seems likely that these stocks are in the portfolio for two reasons. The first of these is that management may expect them to deliver sufficient capital gains to more than make up for their lack of yield. The second reason is that these stocks have been responsible for a good proportion of the total return of the S&P 500 index (SPY) over the past few years. I discussed this here and here. The presence of these stocks may thus be an attempt by the fund’s management to ensure that the fund’s performance does not significantly lag the S&P 500, which tends to cause it to quickly lose the favor of investors.
Many of these holdings are the same as what they were the last time that we looked at the fund, although the weightings have changed somewhat. Indeed, the only major changes are Mondelez International (MDLZ) and Bank of New York Mellon (BK) being replaced by Adidas (OTCQX:ADDYY) and Zoetis (ZTS). This would appear to suggest that the fund has a relatively low turnover rate. This is indeed the case as its 60% turnover is reasonable for an equity fund. As a general rule, we tend to like low turnover because it helps to keep trading costs down. All else being equal, low trading costs should mean that more money is available to make its way down to the bottom-line and investors. This is obviously something that is nice to see.
As my long-time readers on the topic of closed-end funds are likely well aware, I do not generally like to see any single position in a fund account for more than 5% of the fund’s assets. That is because this is approximately the point at which a position begins to expose the portfolio as a whole to idiosyncratic risk. Idiosyncratic, or company-specific, risk is that risk which any asset possesses that is independent of the market as a whole. This is the risk that we aim to eliminate through diversification but if the asset accounts for too much of the portfolio, then this risk will not be completely diversified away. Thus, the concern is that some event may occur that causes the price of a given asset to decline when the market itself does not and if it accounts for too much of the portfolio it may end up dragging the entire fund down with it. As we can see above, there is only one asset that accounts for more than 5% of the fund, Alphabet, but it is not significantly above it. Thus, the fund appears to be reasonably well diversified and there is probably not too much to worry about here.
One of the problems that many global funds have is an overexposure to the United States. The United States accounts for about 40% of global market capitalization and just under a quarter of global gross domestic product. However, there are several funds that have weightings of 60%+ to the nation. This one fortunately does somewhat better in this respect:
Source: CEF Connect
The total weighting towards the United States is 53.34%. This is reasonable and certainly does a better job at reflecting the nation’s actual presence in the global economy than what many other funds accomplish. This is nice because as I pointed out in various recent articles and linked to above, the American capital markets look extremely expensive relative to numerous foreign ones and as such investors may be able to improve the long-term performance of their portfolios. This fund can help accomplish that.
As stated in the introduction, one of the biggest problems facing income investors is an inability to derive any significant degree of income off of the assets in their portfolios. This is a particularly big problem for retirees as they are highly dependent on their portfolios to produce the income that they need to finance their lifestyles and pay their bills. The cause of this problem is the policies that have been pursued by the Federal Reserve over the years since the financial crisis. Specifically, this refers to the central bank’s control over the federal funds rate, which is the rate at which the nation’s commercial banks lend money to each other on an overnight basis. As we can see here, the bank cut this rate to all-time lows in 2007 following the collapse of Lehman Brothers and left it there for more than a decade until the Trump Administration. Although the bank did attempt to raise the rate at that time, it remained quite low by historical standards. The outbreak of the coronavirus pandemic changed all this and the bank once again cut the rate to all-time lows, where it remains today:
Source: Federal Reserve Bank of St. Louis
As of the time of writing, the federal funds rate sits at 0.08%. This is important because this rate influences the interest rate of everything else in the economy. This is the reason why things such as mortgages currently have such low rates. It is also the reason why things such as bank savings accounts and certificates of deposit currently have such low rates. It is also the reason why things such as bank savings accounts and certificates of deposit are yielding essentially nothing. This has forced retirees to pursue other options to obtain the income that they need to pay the bills.
The option that many of them have chosen to pursue is to move their money out of safe bank accounts and into risk assets such as stocks and bonds. This influx of new capital into the asset markets has had the effect of pushing up stock prices, which has been great for those investors seeking capital returns, but it has had the unfortunate effect of suppressing yields. We can see this by looking at the yield on the S&P 500 index, which is 1.24% as of the time of writing. The bond market is not really any better as the iShares Core U.S. Aggregate Bond ETF (AGG) only yields 1.83% currently. At these yields, even a $1 million portfolio would produce less income than a minimum wage job in the absence of capital appreciation, which is by no means guaranteed.
The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund is able to do much better than this due to the strategy that it uses and its ability to distribute capital gains to investors. As mentioned earlier, the fund yields 6.79% at the current price, which is sufficient to kick our income up to $67,900 off of a $1 million portfolio. This is certainly enough to provide for a reasonable lifestyle in retirement when combined with likely Social Security income.
The primary objective of the fund is to provide its investors with a high level of total return. As in the case of many funds though, the provision of current income makes up a sizable percentage of a fund’s total returns. As such, the fund pays out a regular monthly distribution to its investors. The distribution is currently $0.1792 per share monthly ($2.1504 per share annually), which gives it a 6.79% yield at the current price. The fund’s distribution has varied a bit over the years but it has overall been rather reliable and in fact it increased a few months ago:
Source: CEF Connect
The fund’s overall reliability is likely to appeal to more conservative investors, who will also likely find it appealing that the fund’s distributions consist entirely of dividends and capital gains, with no return of capital component:
Source: Fidelity Investments
The reason why this is likely to be attractive is that a return of capital distribution can be a sign that the fund is returning the investors’ own money back to them. This is obviously not sustainable over any sort of extended period. There are other things that can cause a distribution to be classified as return of capital however, such as the distribution of unrealized capital gains. This is of course something that we could conceivably imagine a fund like this doing but we seemingly do not have to worry about that here. As I have pointed out in the past though, it is possible for the fund’s distributions to be misclassified so we do want to figure out for certain how it is financing these distributions in order to determine how sustainable they are likely to be.
Unfortunately, we do not have a particularly recent document to consult for this purpose. The fund’s most recent financial report corresponds to the six-month period ended April 30, 2021. This report will as such not include any information about the fund’s performance over the past few months. It is a more recent report than what we had the last time that we looked at the fund though and this report will give us a good idea of how well the fund performed during the incredibly strong market following the most recent presidential election. During this six-month period, the fund received a total of $4,245,547 in dividends and $1,968,958 in interest off of the investments in its portfolio. This gives it a total income of $6,214,505 during the period. The fund paid its expenses out of this amount, leaving it with $3,407,461 available for the investors. This was unfortunately nowhere near enough to cover the $13,407,448 that it actually paid out over the period, however. Fortunately, the fund does have other ways to make money to cover its distributions such as through the use of capital gains. It greatly succeeded at this, realizing $20,115,185 in net gains and seeing another $101,768,742 in net unrealized capital gains. This was quite obviously more than enough to cover the distributions. Overall then, this distribution appears to be reasonably secure.
As is always the case, it is critical that we do not overpay for any asset in our portfolios. This is because overpaying for any asset is a surefire way to generate a suboptimal return off of those assets. In the case of a closed-end fund like the Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund, the usual way to value it is by looking at a metric known as the net asset value. The net asset value of a fund is the total current market value of all of the fund’s assets minus any outstanding debt. It is therefore the amount that the shareholders would receive if the fund was immediately shut down and liquidated.
Ideally, we want to purchase shares of a fund that are trading at a price that is less than their net asset value. That is because such a scenario implies that we are acquiring the fund’s assets for less than they are actually worth. This is unfortunately, not the case here. As of October 25, 2021 (the most recent date for which data is available as of the time of writing), the fund had a net asset value of $30.97 but it actually trades for $31.79 per share. This represents a 2.65% premium to net asset value. This is well above the 1.38% premium that the fund has averaged over the past month. It is also quite a bit higher than the discount that the fund had the last time that we looked at it. It might therefore make sense to wait for the price to come down a bit before making a purchase of its shares.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.