BDJ: Close-Ended Diversified Equity Fund Likely To Sustain Its High Yield

Summary

  • BDJ’s yield is quite high as compared to average income funds, and a minimum positive price growth will generate double-digit returns.
  • Due to its deep diversification, BDJ is in a position to absorb the sectorial risks that have begun due to economic uncertainty.
  • Due to a huge price loss in 2022, the fund has most likely become undervalued.
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About BlackRock Enhanced Equity Dividend Trust

BlackRock Enhanced Equity Dividend Trust (NYSE:BDJ) is a closed-ended equity fund (CEF) launched by BlackRock, Inc., and managed by BlackRock Advisors, LLC. This fund benchmarks performance of its portfolio with the Russell 1000 Value Index. Formed on August 31, 2005, this fund was formerly known as BlackRock Enhanced Dividend Achievers TM Trust.

It invests in equity securities seeking current income and current gains, with a secondary objective of long-term capital appreciation. In order to ensure and enhance distribution of dividends, BDJ invests primarily in common stocks that pay above-average dividends and also writes options. The stock currently is trading at its 52-week low, and the price multiples indicate a possible undervaluation.

BDJ has a Fully Diversified Portfolio

BlackRock Enhanced Equity Dividend Trust is a global investment fund and makes almost one-fourth of its investment in equity markets outside the United States. BDJ has invested almost 70 percent of its fund in the equity shares of companies engaged in the business of information technology & communication (18 percent), financials (21 percent), healthcare (23 percent), and consumer discretionary (8 percent). In general, these sectors have much higher volatility than the core/basic sectors of the economy such as materials, real estate, energy, utilities, industrial, consumer staples, etc.

BDJ's portfolio includes more than 300 equity shares, and thus a very small proportion of the entire fund is invested in a single stock. The closed-ended fund has invested in excess of 2 percent of its total fund only in 10 stocks - Wells Fargo & Company (WFC), Anthem, Inc. (ANTM), Citigroup Inc. (C), American International Group, Inc. (AIG), Cisco Systems, Inc. (CSCO), Enterprise Products Partners L.P. (EPD), Sanofi (SNY), BP p.l.c. (BP), AstraZeneca PLC (AZN), and Medtronic plc (MDT). These top 10 companies account for one-fourth of the fund's entire investment.

Dividend and Price Performance

BlackRock Enhanced Equity Dividend Trust has an asset under management (AUM) of $1.7 billion which it has invested in large-cap high dividend-paying stocks. This fund has been paying steady monthly dividends since its inception. BDJs current yield is more than 9 percent, and it has recorded an average yield of close to 8 percent over the past ten years.

Throughout, its average annual yield has ranged between 6 percent to 11 percent. This yield is quite high compared to average income-generating funds. Understandably, such yields will be quite attractive for income-seeking investors, especially when the fund has a monthly payout. However, being a fully diversified global close ended fund, its expense ratio (0.85 percent) is relatively higher than the exchange traded funds (ETF), but lower than average closed-ended funds.

When a fund pays such a high yield, a minimum positive price growth will be good enough to generate a double-digit return for its shareholders. BDJ has been successful in doing that over the years. The fund has generated double-digit total return in the medium and long term. However, the past one year has been really bad for BDJ. Due to a price loss of almost 13 percent, the total return was extremely disappointing. Incidentally, the fund lost most of its value during this year only. The price of BDJ is currently trading below $9, and it may drop down further as indicated by the simple moving averages (SMAs).

Comparison with Other Closed-Ended BlackRock Funds

A comparison can be made with other closed-ended equity funds of BlackRock, Inc. such as Energy and Resources Trust (BGR), BlackRock Health Sciences Trust (BME), Enhanced International Dividend Trust (BGY), BlackRock Utilities, Infrastructure, & Power Opportunities Trust (BUI) and BlackRock Science and Technology Trust (BST).

There is a particular pattern in the nature of investments. On an average, these funds have a low AUM, invest in large-cap stocks, and pay a very high yield. Most funds pay monthly dividends. With regards to BlackRock Enhanced Equity Dividend Trust, it performed much better than the other dividend fund, BGY. BDJ also is one of the best-diversified funds in the BlackRock family of funds. This surely has helped BDJ to stay ahead of its peers.

What Lies Ahead?

The current price of BlackRock Enhanced Equity Dividend Trust is so low that even a dollar of price loss will mean a double-digit price loss. Thus, the investors may not be very much concerned about the price drop, as long as they are getting a strong or healthy dividend. Is the yield sustainable? Partially yes, as the large-cap stocks will hopefully continue to persist with their dividend payouts. Moreover, in an environment of rising interest rates, the financial sector may actually do well, which will further boost their payouts.

But, there is a risk of such companies suffering from the ongoing economic condition, as the majority of investments are in non-core sectors, which are more volatile during a poor economy, rising inflation, interest rates and looming recession. The ongoing war in Ukraine is also going to impact the large-cap stocks, especially of those financial firms who have global reach and exposure in that region. If the war spreads beyond Ukraine, that will be detrimental for the financial firms, as they have high exposure in Europe.

Some of BDJ's major investments are in renowned global financial companies such as WFC, C, AIG, Bank of America Corporation (BAC), Fidelity National Information Services, Inc. (FIS), and JPMorgan Chase & Co. (JPM). The economic sanctions and lack of business obviously will impact them. Hopefully, the positive growth factors will nullify the negative impacts, especially in the financial sector. Other sectors probably will continue to deliver the same way, at least with respect to payment of dividends.

Investment Thesis

Hopefully, BlackRock Enhanced Equity Dividend Trust continues with its steady dividend pay-out that investors consider for their monthly income. Due to its deep diversification, this fund is in a position to absorb the sectorial risks that have arisen due to the Covid-19 pandemic, poor economic condition, inflation, interest rate hikes, and war in Ukraine. The higher exposures in financial and healthcare companies may turn out to be beneficial for this fund. The fund seems to be undervalued, too. Thus, this is probably a good fund to have at this point of time.

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