High Yields Calling

“Sure a 5% yield with the potential for capital appreciation sounds nice and all, but do you have anything that yields around 10% and will appreciate?”

As a matter of fact, I do. The five highest yields in the portfolio are a motley crew, so let’s briefly review who they are and how they’ve come by their generous payouts.

The Eaton Vance Tax-Advantaged Dividend Income Fund (EVT) is a closed-end fund that invests primarily in blue-chip dividend paying U.S. stocks. Top holdings include JPMorgan Chase (JPM), Wells Fargo (WFC), Johnson & Johnson (JNJ) and General Electric (GE), along with a ETF specializing in preferred stocks. Like many closed end funds, EVT juices its dividend income and capital gains with a bit of leverage, in its case amounting to 22% of the portfolio’s $1.6 billion in net assets.

EVT pays a regular monthly distribution of 14.5 cents per share, which works out to $1.74 annualized, or 8.1% of the current price. That price is 3% below net asset value. NAV increased 11.6% last year and is up 4.5% so far in 2017. The expense ratio is 1.47%, which includes 0.29% in borrowing costs.

The Eaton Vance Tax-Advantaged Global Dividend Opportunities Fund (ETO) is very similar, except that it applies its 26% of leverage to a more diverse set of investments, including a 32% allocation to foreign stocks, and roughly 20% divvied up among preferred stocks and corporate bonds, investment grade as well as high yield. The fund’s top recent holding, Alphabet (GOOG) doesn’t even pay a dividend, but since it’s up 17% year-to-date no one is complaining, in all likelihood. Top overseas investments are Nippon Telephone and Telegraph, Switzerland-domiciled Chubb (CB) and Hong Kong life insurer AIA Group.

ETO’s regular monthly distribution of 18 cents per share adds up to $2.16 annualized, or 9% of the current share price. The share price is now marginally above the net asset value. NAV is up 11%  year-to-date while the share price has jumped 18%. The expense ratio is 1.71%, including 0.39% in interest expense.

The other high-yielding domestic closed-end fund in the portfolio is the PIMCO Dynamic Credit and Mortgage Income Fund (PCI). Mortgage-backed and asset-backed securities make up 67% of the portfolio, and leverage adds nearly 46% to the fund’s $3 billion in assets. NAV increased 18% in 2016 and 7% so far in 2017, but the price rallied more, erasing a discount to NAV that stood at more than 9% a year ago.

PCI pays a regular monthly distribution of 16.4063 cents per share, or $1.97 annualized. It also distributed a special cash dividend of 63 cents per share in December. In total, payouts over the past year amounted to 11.7% of the current price, or 8.8% based on the regular monthly dividend only. All that credit expertise doesn’t come cheap: the expense ratio is a very high 3.2%, including 1.16% in interest expense.

Sanchez Production Partners (SPP) is a once orphaned upstream MLP that has found a new sponsor and refashioned itself into its midstream services provider. It operates primarily in the Eagle Ford shale, which is benefiting from proximity to the Gulf Coast and new drilling techniques that increased well productivity and driller returns. The current distribution yields an annualized 11.9% at the current share price, and is set to rise 6% this year.

Last but not least, NRZ Residential Investment (NRZ) is a specialized real-estate investment trust profiting from the tiny sliver of the home mortgage payments stream intended to cover servicer costs for the duration of the mortgage.  NRZ’s portfolio is not likely to be impaired by modestly higher interest rates, and in fact would be helped by them if the home refinancings  slow as a result. The stock has rallied over the last year as prior concerns about NRZ’s business model and sponsor receded. The recently increased and fully covered dividend yields an annualized 11.8% based on the current share price.



Stock Talk

Gayle Koch

Gayle Koch

Do you feel comfortable recommending a CEF which is trading at a premium to its NAV?

Igor Greenwald

Igor Greenwald

I wouldn’t if the premium was significant. In ETO’s case it was at a discount when I was researching but at a premium of 0.3% as of Tuesday, and so I didn’t consider it a deal breaker. I would caution you, though, and will probably need to reiterate to everyone, that the closed-end funds rely on capital gains as well as income and that therefore their distributions and price relative to NAV are closely tied to the performance of the equity and credit markets.

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