Thursday, April 24, 2008

Eaton Vance Tax Advantaged Dividend Income Fund

WSJ is out recommending EVT today 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 close-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?


Anonymous said...

There is NO leverage used in this fund - please do some research before posting bad info.

Gaurav said...

What are auction rate preferred securities if not leverage? The fund has used them all along

Rajiv Vyas said...

The fund had 25% as of 08/31/2007


Nice look at things.