EVT: Leveraging a Deep Discount and 8%+ Yield for Tax-Advantaged Income Growth

For moderate-risk income investors seeking tax-efficient returns, closed-end funds (CEFs) like the Eaton Vance Tax-Advantaged Dividend Income Fund (EVT) offer a compelling blend of yield, diversification, and market-driven opportunities. As of October 2023, EVT trades at a -6.34% discount to its net asset value (NAV) of $22.17, while delivering a 8.54% distribution yield based on its $0.1488 monthly payout. This combination of a deep discount and a high yield, coupled with the fund's tax-advantaged structure, creates a unique entry point for investors willing to navigate the nuances of CEF investing.

The Attraction of a Deep Discount

EVT's current discount is significantly wider than its historical averages. Over the past five years, the fund has traded at an average discount of -2.29%, narrowing to -3.96% over the last 12 months. The current -6.34% discount represents a Z-Score of -1.26 for the 12-month period, indicating it is trading at a statistically extreme level relative to its historical norms. This widening discount may reflect broader market dynamics, such as reduced demand for CEFs in a rising interest rate environment or sector-specific risks tied to the fund's heavy exposure to financials (e.g., JPMorgan Chase and Wells Fargo).

For income investors, this discount presents an opportunity. When a CEF trades below its NAV, it often signals undervaluation, especially if the fund's underlying assets remain stable or appreciating. EVT's portfolio, which is 79% allocated to dividend-paying equities and 19% to bonds, has maintained a consistent cash flow profile. The fund's 8.54% yield is calculated relative to its share price, but its 8.05% yield on NAV suggests the distribution is well-supported by its asset base. This dual-yield dynamic—high yield on price, moderate yield on NAV—can create a margin of safety for investors who believe the discount will narrow over time.

Leverage and Volatility: A Double-Edged Sword

EVT's use of leverage (21.29% of assets) amplifies both its returns and risks. Leverage allows the fund to enhance income generation by borrowing capital to invest in higher-yielding assets, but it also increases sensitivity to market downturns. For example, during the 2022 market selloff, EVT's total return on NAV was -10.98%, underperforming the S&P 500's -19.44% total return. While leverage helped the fund outperform in 2021 (25.13% vs. S&P 500's 26.29%), it also contributed to volatility that may deter risk-averse investors.

However, leverage can work in favor of income investors when paired with a wide discount. If the fund's NAV grows while the discount remains wide, the share price could appreciate as the discount narrows. This scenario is plausible given EVT's tax-advantaged structure, which prioritizes dividend income and capital gains harvesting. The fund's managed distribution policy—where payouts are funded by a mix of income, returns of capital, and capital gains—ensures a steady yield, even in low-interest-rate environments.

Strategic Entry Points: Timing the Discount

Historical data suggests that EVT's discount has fluctuated between a -7.64% low and a +2.56% premium over the past 52 weeks. For moderate-risk investors, the current -6.34% discount represents a strategic entry point, particularly if the fund's discount-mean reversion trend continues. The Z-Score analysis further supports this: a -1.26 reading for the 12-month period implies the fund is trading at a level that could attract arbitrage or long-term buyers seeking value.

To contextualize this, consider the fund's performance against the S&P 500. While EVT underperformed the index in 2023 (5.78% vs. 26.29%), its 2024 rebound (17.32% vs. 25.02%) and year-to-date 2025 gains (5.72% vs. 9.64%) demonstrate resilience. Investors who entered at the 2023 low could now benefit from both capital appreciation and dividend income.

Risks and Considerations

While EVT's deep discount and high yield are attractive, investors must weigh several risks:
1. Leverage Risk: The fund's 21.29% leverage increases volatility and could exacerbate losses during market downturns.
2. Sector Concentration: Financials make up a significant portion of the portfolio, exposing it to sector-specific risks like regulatory changes or credit stress.
3. Discount Volatility: The fund's discount could widen further if market sentiment deteriorates, locking in losses for new buyers.

For moderate-risk investors, these risks can be mitigated by:
- Dollar-Cost Averaging: Gradually building a position to smooth out price fluctuations.
- Monitoring the Discount: Tracking the fund's Z-Score and historical discount trends to identify narrowing opportunities.
- Diversifying Holdings: Balancing EVT with other CEFs or ETFs to reduce sector-specific exposure.

Conclusion: A Tax-Advantaged Play for Income Seekers

EVT's combination of a deep discount, 8%+ yield, and tax-advantaged structure makes it a compelling option for moderate-risk investors seeking income growth. The fund's leverage and sector concentration introduce volatility, but these risks are offset by its disciplined distribution policy and potential for discount narrowing. For investors who can tolerate short-term fluctuations and prioritize tax efficiency, EVT offers a strategic entry point to capitalize on CEF market dynamics.

As always, due diligence is key. Investors should assess their risk tolerance, time horizon, and tax situation before committing to EVT or any CEF. In a market where income opportunities are scarce, EVT's unique profile could prove to be a valuable addition to a diversified portfolio.