Is It Time To Reconsider Asset Strategies?
This 8% Yielder Looks Pretty Strong
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.
I talk a lot about an impending credit event and, while U.S. equity prices have yet to respond to these growing risks in any major way, it’s still a good idea for investors to prepare for it now before it happens. That means considering some defensive shifts in your portfolio. This year has mostly been about the big mega-cap tech trade driving returns, but that rally looks like it’s fizzled out and investors are starting to focus elsewhere. More conservative strategies that look at financial health and long-term dividend growth should be considered as the risk of something breaking in this economy grows.
The Eaton Vance Tax-Advantaged Dividend Income Fund (EVT) combines the benefits of dividend income with a structure that allows investors a more favorable tax treatment. That latter piece might be especially important. We often hear about how dividend funds are better off outside of taxable accounts because those distributions will get taxed every time they’re made. EVT isn’t able to avoid that tax exposure altogether, but it does focus on income where tax treatment is minimized. This along with the durable nature of this portfolio could be what investors need in this deteriorating environment.
Fund Background
EVT’s investment objective is to provide a high level of after-tax total return consisting primarily of tax-advantaged dividend income and capital appreciation. It attempts this by investing in dividend-paying common and preferred stocks that Eaton Vance believes at the time of investment are eligible to pay dividends that qualify for federal income taxation at rates applicable to long-term capital gains. The fund will invest in stocks that are, in the opinion of the adviser, undervalued or inexpensive relative to the overall market. It also utilizes leverage in order to enhance yield and total return potential.
It’s important to point out right off the bat here that EVT isn’t an all-stock portfolio. It’s actually about 80% invested in large-cap defensive equities and 20% invested in fixed income, which includes a combination of investment-grade bonds, junk bonds and preferreds. Asset allocation strategies took an historic beating in 2022 with stocks and bonds both getting pummeled at the same time, but this mix might actually work out well from here. Bonds provide a much better income option with yields at 5% than they did 18 months ago and the defensive nature of the equity sleeve could be better positioned heading into a potential credit event.
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