BDJ CEF: Secure High-Yields Without Chasing Yields

seekingalpha08-27

The BlackRock Enhanced Equity Dividend Fund leverages factor investing and options strategies to mitigate price volatility while providing substantial income through dividends and option premiums.BDJ'...

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href=https://seekingalpha.com/article/4717226-bdj-cef-secure-high-yields-without-chasing-yields><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The BlackRock Enhanced Equity Dividend Fund leverages factor investing and options strategies to mitigate price volatility while providing substantial income through dividends and option premiums.BDJ'...</p>\n\n<a href=\"https://seekingalpha.com/article/4717226-bdj-cef-secure-high-yields-without-chasing-yields\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BDJ","symbol_name":"BlackRock Enhanced Dividend 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appreciation with risk management, making it attractive in a low-interest-rate environment.Despite risks like negative skewness and excess kurtosis, BDJ's historical performance and respectable fees support its potential for solid income-based returns.Economic uncertainties persist, but BDJ's volatility-hedged strategy offers a compelling alternative to pure dividend stocks, enhancing capital returns while reducing price risk.   peterschreiber.media The U.S. interest rate environment has reached an inflection point, introducing an exciting landscape for dividend stocks. Therefore, I decided to revisit our outlook on the BlackRock Enhanced Equity Dividend Fund (NYSE:BDJ), a closed-ended fund that exposes investors to dividend stocks while mitigating price volatility through a covered call overlay. We last covered the CEF in November 2022, arguing in favor of its strategy. However, given the differentiated macroeconomic environment, I updated our outlook. Herewith are a few of our latest thoughts.   Latest BDJ Rating (Seeking Alpha) A Reminder of BDJ CEF's Infrastructure The BlackRock Enhanced Equity Dividend Fund emphasizes factor investing and options overlay, whereby it invests in dividend stocks with high-quality attributes and hedges a proportionate amount of its long positions by writing options for additional income. Although it hedges its portfolio, BDJ, it is only partially hedged, allowing space for capital appreciation (or depreciation). The CEF's latest data set showed that it has overwritten about 50.27% of its portfolio, which has 93 constituents. Moreover, it possesses a trailing return of capital yield of 7.87% through monthly distributions.   iShares The following panel illustrates BDJ CEF's year-to-date returns, showing that its income component plays a significant role in its total return, which is essential to emphasize. Data by YCharts Factor Analysis For those unaware, factor investing is a methodology used to isolate systematic risk by merging portfolios of assets with similar characteristics. Among many methods, factor concentration can be executed by combining assets with similar macroeconomic, style-based, or thematic traits. Aside: Here's a link explaining factor investing. Income-seeking investors often invest in dividend stocks whenever interest rates recede because bond yields tend to shrink. Therefore, the BlackRock Enhanced Equity Dividend Fund seems like a good option, as talks of a U.S. interest rate pivot are intense. In 2015, Zhen Wei of MSCI analyzed dividend stock performance versus interest rates. His 88-year period regression analysis is embedded in the following diagram, which shows that dividend stocks provide excess returns whenever interest rates are low.   Dividend Stocks Vs. Interest Rate Regression (MSCI) In addition to Wei's core findings, he added that \"yield chasing\" in a receding interest rate environment is dangerous and argued that structurally lower interest rates provide a better platform. I concur with Wei's findings, as an interest rate pivot can be associated with lower economic persistence, higher risk premiums, and lower nominal corporate earnings. In fact, the U.S.'s worsening unemployment rates, slowing manufacturing PMI, and waning business confidence prove the point.   U.S. Economic Indicators (Trading Economics) In spite of his comprehensive findings, Wei's regression covers one piece of the puzzle. BDJ CEF has additional factors that might phase out the aforementioned economic risk. For instance, it screens for high-quality stocks with throughout-the-cycle attributes, conveyed by the following data set, which communicates BDJ's top 10 constituents' five-year average return-on-equity and dividend yield ratios.   Stock 5-Y AVG ROE TTM D.Yield   Wells Fargo (WFC) 8.44% 2.56%   Citigroup (C) 7.99% 3.46%   American International Group (AIG) 7.67% 1.96%   General Motors (GM) 15.38% 0.86%   Micron (MU) 7.01% 0.45%   Fidelity National Information (FIS) -10.16% 2.22%   First Citizens Class A (FCNCA) 25.89% 0.28%   BP Plc (BP) 1.36% 5.24%   Kraft Heinz (KHC) 4.5% 4.46%   L3 Harris Technologies (LHX) 8.64% 1.99%   Click to enlarge Source: Seeking Alpha - BDJ's Top 10 Spans More Than 25% Of Its Portfolio. Aside: For information about how ROE can contribute to throughout-the-cycle returns, visit this link. Furthermore, BDJ CEF can use its option writing strategy to mitigate cyclical price risk and generate additional income. For those unaware, the approach involves lending options to counterparties for an initial fee. In BDJ CEF's instance, the options are written on the underlying assets, meaning the strategy hedges price risk and will only void the initial income if the options are in the money. Aside: Here's a link that explains the concept. In essence, investors might exploit the systematic dividend factor when interest rates are lower. However, economic risk remains a noteworthy consideration. As such, I prefer BDJ CEF over pure dividend factors because it mitigates price risk and produces some of its capital return through options strategies instead of chasing high yields. Valuation, Expenses, and Return of Capital BDJ traded at a 9.72% discount on June 31st and has maintained its discount-to-net asset value status since then. I think demand for this CEF will rise, closing the P/NAV gap. However, the vehicle's options strategy introduces delta and gamma risk, meaning a discount-to-NAV might be justified, especially as the fund has a history of trading below its NAV. Data by YCharts Furthermore, I think BDJ CEF's fees are respectable. Remember, the fund engages in active trading through options writing. Although it uses its income to enhance its capital return, excess monitoring fees, staff expertise, and commissions are probable.   iShares Lastly, if we look at BDJ CEF's capital returns, it is shown that the CEF has delivered average annualized yields between 6.45% and 13.4% in the past ten years. The CEF's yields will likely fluctuate contingent on the success of its options strategy, the dividends of its underlying assets, the capital appreciation of its underlying assets, and its own capital appreciation. Nevertheless, I think history shows that this vehicle has immense income-based attributes.   Format Adjusted By Author (Seeking Alpha) Noteworthy Risks Despite being bullish about BDJ CEF's prospects, I identified a few noteworthy risk factors. First, the CEF has excess kurtosis and negative skewness. The latter conveys that BDJ CEF's mean shifts to the left side of the bell curve more than to the right side (of the bell curve), while the prior signals show that BDJ often exhibits tail events. The CEF's monthly conditional value-at-risk (5%) substantiates the abovementioned. For those unaware, the CEF's 12.27% CVAR means it has lost an average of 12.27% in its 5% worst trading months. I consider the metric dangerous and indicative of tail risk.   Metric Value   Sharpe Ratio 0.49   Kurtosis 3.10   Skewness -0.60   Conditional Value-at-Risk 12.27%   Click to enlarge Source: Portfolio Visualizer Furthermore, the BDJ CEF's options strategy introduces delta and gamma risk. The prior refers to the non-linear relationship between option and stock prices. Additionally, as a secondary effect, gamma refers to the rate of change differential. Basis risk might arise from delta and gamma, meaning imperfect options strategies will likely occur, leading to inconsistent return distributions. Final Word I believe investors will opt for dividends when an interest rate pivot occurs. However, the economic tail risk adds uncertainty to such an outlook. Therefore, the BlackRock Enhanced Equity Dividend Fund might provide a noteworthy proxy, as its volatility-hedged options strategy can reduce price risk while elevating capital returns.  History shows that the closed-ended fund has a solid distribution and respectable expenses. Although risks such as negative skewness and excess kurtosis are evident, I'm net bullish about this vehicle's intermediate-term prospects.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462902071"}