Assessing Dividend Sustainability in High-Yield Healthcare Funds: The Case of BlackRock Health Sciences Term Trust II (BMEZ)

In the pursuit of income generation, high-yield healthcare funds have long attracted investors seeking both capital preservation and reliable cash flows. Among these, BlackRock Health Sciences Term Trust II (BMEZ) stands out for its double-digit dividend yield, currently hovering around 14.84%. However, the fund's payout model raises critical questions about sustainability. For income-focused investors, the key challenge lies in balancing the allure of high returns with the risks of financial strain—a tension that BMEZ's structure exemplifies.

The Attraction of High Yield: A Double-Edged Sword

BMEZ's 11.25% trailing twelve-month (TTM) dividend yield positions it among the top 25% of dividend payers in the Financial Services sector. This metric, coupled with its monthly payout frequency, makes it a compelling option for retirees and other income seekers. Yet, the fund's payout ratio—a critical barometer of sustainability—tells a more complex story. While its 2025 effective payout ratio is reported as 0%, this anomaly stems from its structure as a closed-end fund (CEF), where dividends are often funded through leverage, return of capital, or capital gains rather than earnings. Historically, BMEZ's payout ratio has ranged from 2.09 to 8.47, with a median of 5.28, suggesting a pattern of distributing more than its earnings in some periods.

This dissonance between yield and earnings raises red flags. A high payout ratio, even when masked by a CEF structure, signals vulnerability to market downturns or rising interest rates. For instance, BMEZ's profitability rank of 1 out of 10 in 2023 and its net profit in only one of the past decade's years underscore its inconsistent earnings foundation. Investors must ask: Is this yield a reward for risk, or a warning of underlying strain?

Leverage and Risk: A Conservative Profile, But Not Without Caveats

BMEZ's leverage ratio of 1.07% as of July 2025 appears modest, with total debt of $10.228 million against $959 million in total investment exposure. This conservative use of debt contrasts sharply with more aggressive CEFs that amplify returns through higher leverage. However, even low leverage introduces risks. For BMEZ, the primary concern lies not in debt per se, but in how dividends are funded.

The fund's managed distribution policy—a common feature in CEFs—allows it to draw from capital gains, return of capital, or borrowing to maintain payouts. While this flexibility can stabilize yields during earnings slumps, it also erodes long-term value. For example, BMEZ's 12-month total return on net asset value (NAV) was -4.25% as of December 2024, indicating that its dividends may be partially sourced from asset liquidation rather than sustainable income. Over time, this approach could weaken the fund's equity base, making it harder to sustain payouts as market conditions shift.

Growth Prospects and Sector Dynamics: A Mixed Outlook

Healthcare, as a sector, is inherently cyclical and capital-intensive. BMEZ's focus on health sciences aligns with long-term trends in biotech and medical innovation, yet its performance lags behind these expectations. The fund's growth rank of 1 out of 10 and its limited profitability over the past decade highlight structural weaknesses. While the fund's 5-year dividend growth rate of 11.71% appears robust, its 1-year decline of -1.38% reflects short-term volatility.

Macro trends also weigh on the fund's sustainability. Rising interest rates, which increase borrowing costs and reduce the present value of future cash flows, could pressure BMEZ's leverage-heavy payout model. Additionally, regulatory risks in healthcare—such as pricing controls or R&D setbacks—could further strain the fund's earnings base.

Investment Implications: A Cautionary Balance

For income-focused investors, BMEZ represents a paradox: a high yield supported by a structurally fragile payout model. The fund's leverage and distribution strategy offer immediate returns but at the expense of long-term stability. This dynamic is particularly relevant in 2025, as the U.S. economy navigates post-pandemic adjustments and the Federal Reserve's rate trajectory remains uncertain.

Investors must weigh these risks against potential rewards. BMEZ's 14.84% yield is attractive in a low-interest-rate environment, but it may not justify the risks for those with low-risk tolerance or long-term horizons. A prudent approach would involve:
1. Monitoring Earnings Reports: The upcoming September 2025 earnings date will provide critical insights into the fund's ability to sustain payouts.
2. Diversifying Income Portfolios: Pairing BMEZ with lower-yield, higher-quality assets can mitigate sector-specific risks.
3. Evaluating Sector Trends: Tracking healthcare R&D pipelines and regulatory developments can help anticipate shifts in the fund's performance.

Conclusion: A High-Risk, High-Reward Proposition

BMEZ's dividend strategy is neither a guaranteed income source nor a clear warning sign, but rather a nuanced blend of both. Its high yield reflects the fund's aggressive pursuit of income, while its payout model reveals structural vulnerabilities. For investors who prioritize stability, the fund's risks may outweigh its rewards. For those comfortable with volatility and equipped to monitor its financial health, BMEZ could offer a compelling, albeit precarious, income opportunity.

In the end, the sustainability of BMEZ's dividend hinges on its ability to align its payout strategy with its earnings and growth potential. Until then, caution remains the watchword for income-focused investors navigating the high-yield healthcare landscape.