Every week, we’ll profile a high yield investment fund that typically offers an annualized distribution of 6-10% or more. With the S&P 500 yielding less than 2%, many investors find it difficult to achieve the portfolio income necessary to meet their needs and goals. This report is designed to help address those concerns.
Right now, it seems like U.S. tech stocks are about the only game in town. Defensive equities are lagging. Cyclicals are struggling despite the U.S. economy appearing to be in fairly good shape. Bonds had a moment in late 2023, but yields are back on the way up again. The only area of the market that’s really delivered strong returns on a consistent basis has been tech and tech-adjacent companies. The “magnificent 7” ruled the landscape in 2023 and that momentum has carried forward into the start of 2024.
For income seekers, there are few options out there that marry mega-cap tech stocks with a high yield strategy, but the Eaton Vance Tax-Managed Diversified Equity Income Fund (ETY) is one of them. Not that it necessarily targets tech stocks specifically, but its diversified equity strategy, which allows it to invest nearly anywhere, gives the fund’s managers the flexibility to take advantage of the market’s hottest stocks. The covered call strategy to generate high income and the tax-managed strategy to minimize taxable events could be added bonuses that lead to big returns for investors.
Fund Background
ETY invests in a diversified portfolio of domestic and foreign common stocks with an emphasis on dividend paying stocks, while simultaneously selling S&P 500 call options on a portion of its portfolio. The “tax-managed” piece of the strategy derives from evaluating returns on an after tax basis and seeking to minimize and defer federal income taxes.
I get a little leery of funds that use incredibly broad mandates, such as this one. We’ll run down the top holdings of this fund in a moment, but we’ll see that the “emphasis on dividend paying stocks” doesn’t equate to “will pay” or even “will mostly pay”. There’s enough flexibility that we should probably assume ETY could invest in just about anything that fits its growth of capital objective. Technically, it’s not doing anything wrong, but I think it’s another example of why investors need to look under the hood to see what any fund is actually invested in. Potential investors should probably view this simply as a large-cap covered call portfolio because that’s really what it looks like in its current iteration.
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