Neuberger Berman MLP and Energy Income Fund Outperforms, While Energy Opportunities Fund Faces Diversification Challenges

NML: Proving Itself As One Of The Best In Class (NYSE:NML)

This idea was discussed in more depth with members of my private investing community, Energy Profits in Dividends. Learn More " The Neuberger Berman Energy Infrastructure and Income Fund Inc (NYSE:NML) is a closed-end fund, or CEF, that income-seeking investors can use as a way of adding high-yielding master limited partnerships, midstream corporations, and similar energy infrastructure companies to their portfolios. The advantage is they can do this without the hassle of dealing with unrelated business taxable income or K-1 forms. This fund is generally considered one of the better ones in this segment, as it handled the 2020 industry collapse quite well and its shares are actually up since 2019: The fund is also one of the highest-yielding ones in the sector, as this fund yields 8.75% at the present price. This is quite a bit higher than the 7.72% yield of the Alerian MLP ETF (AMLP) and is higher than most peers. We can see that here: As we can clearly see, the NXG Cushing Midstream Energy Fund is the only energy infrastructure closed-end fund that manages to beat this one in terms of yield. This is something that will undoubtedly be attractive to any investor who is even considering a position in one of these funds. After all, most people who invest in master limited partnerships in the first place do so because of the high yields that are obtainable in the sector. Thus, it makes sense that these same investors would gravitate toward the funds with the highest yields. The fund's high yield also means that investors receive a higher level of income from a given monetary investment, and we all like to have higher incomes in an inflationary environment. As regular readers might remember, we previously discussed the Neuberger Berman Energy Infrastructure and Income Fund in mid-June of this year. The equity market has generally been strong since that time, including when it comes to midstream companies. The past two years or so have proven to be a very different environment for these companies than the one that we became accustomed to before the COVID-19 pandemic. Many investors appear to be more interested in high-yielding companies than in the past, and this has been shown in their market performance. As such, we might expect that the fund's performance has been fairly solid since our previous discussion. This is indeed the case, as shares of the Neuberger Berman Energy Infrastructure and Income Fund have appreciated by 5.12% since our previous discussion. This was far better than what the S&P 500 Index (SP500) or the Alerian MLP Index delivered over the same period: This will undoubtedly be attractive to just about any potential investor. After all, we all like to outperform the market and overall, this fund has done a pretty good job at accomplishing this. However, there could be some concern that the fund's shares have gotten ahead of themselves, as the lower performance of the Alerian MLP Index could suggest that the fund's portfolio was unable to match this performance. As I noted in my last article on this fund, however: A simple look at a closed-end fund's price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. Along those lines, it is generally best to consider the distributions that a closed-end fund pays out when analyzing its performance. This is because these distributions represent very real returns to the shareholders that are not going to be reflected in the price performance. When we include the distributions that the Neuberger Berman Energy Infrastructure and Income Fund paid out since our previous discussion, we get this alternative chart: As we can clearly see, the fund's distribution lifted its total return over the two-month period by 150 basis points or so. The high yield of the Alerian MLP Index also lifted its total return up a bit, but not to the same extent, since the index has a lower yield than the Neuberger Berman Energy Infrastructure and Income Fund. The worst performer here in terms of total return was actually the S&P 500 Index, which represents a stark departure from the pre-pandemic market environment. Overall, it certainly appears that we are in something of a new reality now when it comes to the attractiveness of high-yielding energy infrastructure plays, as these assets have been performing very well compared to large-cap stocks for a while. In any case, investors in this fund seemingly have little to complain about when it comes to its performance. As two months have passed since our previous discussion, it is logical to assume that a few things have changed. In particular, the Neuberger Berman Energy Infrastructure and Income Fund released an updated financial report that details its performance during the first half of its fiscal year. We will pay close attention to that as we continue our discussion today, as it may reveal whether we need to update our thesis on this fund. According to the fund's website, the Neuberger Berman Energy Infrastructure and Income Fund has the primary objective of providing its investors with a high level of total return. Here is the full description from the webpage: This simply tells us that the Neuberger Berman Energy Infrastructure and Income Fund invests in companies that earn their revenue by moving, storing, or processing energy. As we have discussed in various previous articles, this is the general description of a midstream energy company. The Williams Companies (WMB) offers this definition of midstream energy: Midstream companies operate the pipeline and gathering or transmission facilities that move the gas from the well (upstream) to our homes and businesses (downstream). Midstream operations also treat the product, remove water or waste products, compress it and get it ready for various markets downstream. The Williams Companies also offers this helpful graphic that originally came from the U.S. Energy Information Administration: Thus, the Neuberger Berman Energy Infrastructure and Income Fund is generally going to be investing in midstream companies, according to the description that was provided on the website. It is worth noting though that the website's description does not explicitly state that the fund will only be investing in companies that provide infrastructure for the oil and gas industry. The fund's statement that it "focuses on companies that provide essential services to move, store, and process energy" could also be applied to electric utilities. After all, the primary business function of an electric utility is to move electricity from a generation facility to our homes and businesses. The semi-annual report appears to concur with electric utilities, fitting with the fund's strategy. The portfolio commentary section even includes the following paragraph: Utilities, following a challenging previous year, have done well thus far in 2024 and have bolstered the Fund's performance. Electricity producers have been increasingly shifting from coal to natural gas and renewable energy sources, which lower overall CO2 emissions, a trend we believe is playing out globally. Since 2010, the natural gas portion of the power mix has risen steadily from 24% to 43% of all domestic electricity consumed in 2023. There is no reason for the fund's commentary to include anything about the performance of utilities unless it invests in these companies. However, this paragraph could be taken in another way. The fund's management makes mention of the rising proportion of natural gas in the nation's energy mix. Unlike with coal, utilities do not keep a substantial amount of natural gas in on-site storage at their generation plants. Rather, midstream companies such as The Williams Companies or Kinder Morgan (KMI) deliver it to the electric generation plant on a constant basis. Thus, the trend away from coal and towards natural gas has resulted in traditional oil and gas midstream companies transporting more natural gas, which causes their cash flows to increase. While that statement may not necessarily mean that the fund is going to invest in utilities, this fund does, in fact, have a few holdings in the sector. The semi-annual report lists the following: This totals 22.2% of the fund's net assets being invested in electric generators or utilities of some sort. This is, admittedly, not really that much for an energy infrastructure fund. After all, the First Trust funds frequently had a much larger allocation to electric utilities than this. However, it is still a large enough allocation to provide this fund with limited exposure to the fundamentals of electric utilities. This could be a good thing, as things such as artificial intelligence and electric vehicles will almost certainly cause electric consumption to increase significantly in the coming years (see here). This fund is not as good a way to play this dynamic as a pure utility fund, though, as it only has 22.2% of its assets invested in electric producers. As might be expected, then, the majority of the fund's net assets are invested in traditional oil and gas midstream plays. The semi-annual report shows the following asset allocation as of May 31, 2024: The two "Oil, Gas & Consumable Fuels" categories all consist mostly of companies that would be considered a midstream corporation or a midstream partnership. For example, here are the companies that are listed as the fund's holdings under the "Common Stocks" segment of the portfolio: Of these companies, Air Products and Chemicals (APD), Antero Resources (AR), California Resources Corp. (CRC), ConocoPhillips (COP), Exxon Mobil (XOM), Neste Oyj (OTCPK:NTOIF), New Fortress Energy (NFE), Occidental Petroleum (OXY), and Tourmaline Oil Corp. (OTCPK:TRMLF) are not, strictly speaking, midstream companies. Some readers might debate whether Cheniere Energy (LNG) is actually a midstream company or not, but most sources consider it to be similar enough to one to include it in this category. The remainder of these are all pipeline operators of various types. The sole company listed under "Oil, Gas & Consumable Fuels Partnerships" is Sunoco LP (SUN), which has operations in the midstream and downstream segments of the energy industry. Thus, we can clearly see that this fund is heavily invested in midstream energy, which is what many investors in this fund would expect. This is nice because these companies generally have stable cash flows over time and pay out a significant proportion of their cash flows to their investors as dividends or distributions. The fund's description on the website does state that it expects a significant proportion of its total return to come in the form of dividends and distributions. This also fits perfectly with what investors likely expect the fund to have. Most of the fund's largest holdings are midstream companies. The fact sheet provides this list of its largest positions as of June 30, 2024: Of the companies on the list, CenterPoint Energy (CNP) and Antero Resources are the only companies that are not midstream firms. This, therefore, reinforces the fact that this fund is primarily focused on midstream companies, even though it has other things included in the portfolio. The only significant change that we see here compared to the fund's largest positions at the time of our last discussion is that Sempra (SRE) was removed from the list and replaced with DT Midstream (DTM). Sempra was still in the fund's portfolio as of May 31, 2024, though, so this change may have been simply due to the company's stock not performing as well as some others. If that is the case, then the stronger performing companies could have simply seen their position size increase enough to knock it off the list. However, Sempra's stock price increased 6.59% during the second quarter, so that seems unlikely: Thus, what we are probably seeing here is one of two possibilities: There is no way to know for sure what happened here until the fund releases its third-quarter 2024 holdings report in a few months. However, for now, we can clearly see the change. As is the case with most closed-end funds, the Neuberger Berman Energy Infrastructure and Income Fund employs leverage as a method of boosting the effective yield and total return that it earns from the assets in its portfolio. I explained how this works in my previous article on this fund: In short, the fund borrows money and then uses that borrowed money to purchase common units of midstream partnerships or corporations. As long as the purchased assets have a higher yield than the interest rate that the fund has to pay on the borrowed money, the strategy works pretty well to boost the effective yield of the portfolio. This fund is capable of borrowing money at institutional rates, which are considerably lower than retail rates. As such, this will usually be the case. With that said though, the beneficial effects of leverage are not as great today with interest rates at 6% as they were three years ago when interest rates were at 0%. Fortunately, most midstream partnerships have yields above 6% so this strategy still works to boost the effective portfolio yield. Unfortunately, the use of debt in this fashion is a double-edged sword because leverage boosts both gains and losses. As such, we want to ensure that the fund is not using too much leverage because that would expose us to an excessive amount of risk. I do not usually like a fund's leverage to exceed a third as a percentage of its assets for this reason. As of the time of writing, the Neuberger Berman Energy Infrastructure and Income Fund has leveraged assets comprising 17.07% of its portfolio. This is a slight improvement over the 17.45% leverage that the fund had the last time that we discussed it. I will admit that I expected it to have seen its leverage decline a bit more based on the share price performance. However, the fund's net asset value is only up 2.86% since the time of our previous discussion: This is, obviously, much less than the fund's share price appreciated over the same period, a trend that has been something of a common theme lately, as many closed-end funds have seen their share price outperform their actual portfolios. This has a noticeable effect on the fund's valuation, which we will discuss later in this article. For now, the takeaway is that the fund's net asset value increased slightly over the period, so it makes sense for its leverage to decline slightly. After all, that will typically be the case unless the fund goes out and borrows more money. This fund did not do that. The fund's leverage is well below the one-third of assets maximum that we would ordinarily want to see. That alone is a good thing for any risk-averse investor, but let us compare the fund to its peers to make sure that its leverage is appropriate for its strategy. This table provides a summary: (All figures from CEF Data.) As we can see, the Neuberger Berman Energy Infrastructure and Income Fund has the lowest level of leverage of its peers. This basically shows that this fund's leverage is pretty reasonable given its current strategy. Overall, investors should not have any outsized risks regarding the fund's leverage here. The primary objective of the Neuberger Berman Energy Infrastructure and Income Fund is to provide its investors with a high level of total return. However, the fund's website specifically states that it expects much of its total return to come in the form of distributions paid to its shareholders. To this end, the fund pays a regular monthly distribution of $0.0584 per share ($0.7008 per share annually). This gives the fund a reasonably attractive 8.75% yield at the current share price. However, the fund has not been especially consistent regarding its distribution over the years: As we can see here, the fund had to cut its distribution dramatically in response to both the events of 2015 and 2020. This is not exactly surprising since both years saw pretty much everything related to the traditional oil and gas industry collapse in price. The industry was generally struggling to obtain capital and many companies changed their business models or overall strategy. For example, we saw numerous midstream companies reduce their distributions in an effort to become less dependent on the capital markets for financing. This naturally resulted in the fund taking substantial realized and unrealized losses and it had to reduce its distributions in order to preserve its net asset value. The Neuberger Berman Energy Infrastructure and Income Fund was not alone in this. In fact, every closed-end fund that invests in this sector had to make similar distribution cuts. This one has done a better job of restoring it than many of its peers since that time though, as the current payout is actually slightly higher than the fund was paying out prior to the COVID-19 pandemic. As such, while its history might be a bit of a turn-off for some, this fund still looks better than most in this respect. As of the time of writing, the most recent financial report that is available is the semi-annual report for the six-month period that ended on May 31, 2024. A link to this report was provided earlier in this article. As this is newer than the one that available the last time that we discussed NML, it should suffice for update purposes as well, considering how well NML did at covering its distribution over the first half of this year. For the six-month period that ended on May 31, 2024, the Neuberger Berman Energy Infrastructure and Income Fund received dividends and distributions totaling $14,648,694 and interest income of $140,438. However, some of this money came from master limited partnerships and so is not considered to be investment income for tax or accounting purposes. As such, the fund only reported a total investment income of $7,759,536 for the six-month period. This was not enough to cover the fund's expenses, and so the fund ended up reporting a $1,271,802 net investment loss. Obviously, that was not sufficient to cover the $19,853,288 that the fund paid out in distributions over the six-month period. Fortunately, this fund was able to make up the difference through capital gains. For the six-month period that ended on May 31, 2024, the fund reported net realized gains of $33,927,799 along with net unrealized gains of $31,970,887. Overall, the fund's net assets increased by $44,773,596 after accounting for all inflows and outflows during the period. The fund's total annual distributions were $39,706,576 in the most recent full-year period. Thus, we can see that simply the excess investment profits earned in the six-month period covered by this report were enough to carry the fund through at least another year. Overall, then, it does not seem like we need to worry too much about this distribution right now. This fund is in solid financial shape. Shares of the Neuberger Berman Energy Infrastructure and Income Fund are currently trading at a 10.49% discount to net asset value. This is a very attractive discount, and it is better than the 9.27% discount that this fund's shares have averaged over the past month. Thus, the current price appears to be a reasonable entry point. In conclusion, the Neuberger Berman Energy Infrastructure and Income Fund is one of the better energy infrastructure closed-end funds. This fund has completely recovered from all the losses that it suffered during the pandemic, and indeed appears to be earning sufficiently high returns to finance its distribution for at least the next year. The fund also should be a bit safer than many others due to its low leverage. Overall, this fund appears to be an excellent way to add a portfolio of midstream corporations and master limited partnerships to a portfolio.

EOI: Good Performance, But Diversification Leaves A Lot To Be Desired (NYSE:EOI)

Looking for a helping hand in the market? Members of Energy Profits in Dividends get exclusive ideas and guidance to navigate any climate. Learn More " The Eaton Vance Enhanced Equity Income Fund (NYSE:EOI) is a closed-end fund, or CEF, that income-focused investors can purchase as a method of achieving a high level of income from the assets that they already possess. The fund does fairly well at this, too, as its 8.23% current yield is fairly attractive when compared to the company's peers. We can see this here: We can see that the Eaton Vance Enhanced Equity Income Fund does not have the highest yield available in the fund category. However, its current yield does still compare quite well to that of many members in the peer group. This is a good sign, as an outsized yield could be a sign that the market doubts the fund's ability to sustain its distribution. That does not appear to be a problem here, as the fund's distribution yield is not ridiculously high relative to the others, but it is still high enough to satisfy most investors who are seeking an attractive level of income. There might be some readers who point out that the fund's yield is nowhere near as high as some of the fixed-income funds that we have discussed in this column. That is certainly true, but the fact that this fund invests exclusively in equities (which have a lower yield than most fixed-income securities) gives it a very real advantage going forward. This is because equities offer much better protection against inflation than fixed-income securities. As I explained in a previous article: One of the nice things about this fund is that it invests in equity securities, so it provides a certain amount of protection against inflation, which may be a bigger problem going forward than it has been in the past. After all, the projections for large fiscal deficits going forward are well-known, and it is difficult to see any way for these deficits to be funded by any method apart from the creation of new currency. Historically, equities, real estate, and gold have been the best ways to preserve the purchasing power of your money against inflation. The Eaton Vance Enhanced Equity Income Fund therefore offers investors a slightly lower yield than would be available from a fixed-income fund, in exchange for better maintaining the purchasing power of their wealth over time. Honestly, that is a very attractive proposition if the fund is to be held for more than a few years. The fiscal problems will not be going away soon, and the market appears to suspect that inflation will reignite as soon as the Federal Reserve starts cutting interest rates. After all, gold prices have been on the upswing over the past few days and gold is historically the go-to asset when investors are worried about inflation. As such, it may be worth moving money out of fixed-income assets and into equity funds like this one to protect yourself. As regular readers might remember, we previously discussed the Eaton Vance Enhanced Equity Income Fund in mid-November of 2023. The equity markets have been strong all around the world since that time. Numerous market participants have been excited about the possibilities that come from generative artificial intelligence, as well as the implementation of a new monetary easing cycle all over the world. As such, we might expect that the Eaton Vance Enhanced Equity Income Fund has also delivered a fairly strong performance since our last discussion. This is indeed the case, as shares of the Eaton Vance Enhanced Equity Income Fund have appreciated by 23.34% since the previous article was published. This is very close to the 23.72% gain that the S&P 500 Index (SP500) delivered over the same period: While this is a good performance that will almost certainly appeal to most investors, especially those who want to earn a high level of income, I will admit that I have some concerns. As we will see in this article, the Eaton Vance Enhanced Equity Income Fund writes covered calls against some equity securities in its portfolio. A fund using such a strategy should not have been able to deliver the same performance as a diversified portfolio of large-cap stocks that does not employ such a strategy. Therefore, it is worth taking a closer look at this fund's portfolio composition and performance to determine whether this price appreciation really is justified. After all, despite the drag from the covered call strategy, it might be possible to deliver a return on par with the large-cap index if the fund is heavily weighted towards only a few high-performing stocks. Much has been written about how the majority of the index's returns over the past year or two have been due to a half-dozen or so stocks, after all. Perhaps most interestingly, investors in this fund actually did far better than investors in the S&P 500 Index over the period in question. As I explained in a recent article, A simple look at the closed-end fund's share price performance does not necessarily provide an accurate picture of how investors in the fund did during a given period. This is because these funds tend to pay out all of their net investment profits to the shareholders, rather than relying on the capital appreciation of their share price to provide a return. This is the reason why the yields of these funds tend to be much higher than the yield of index funds or most other market assets. When we include the distributions that were paid out by the Eaton Vance Enhanced Equity Income Fund since mid-November of last year (the time of our previous discussion on this fund), we get this alternative performance chart: As expected, investors in this fund significantly outperformed the S&P 500 Index over the period in question. This is mostly because the fund's share price nearly matched the performance of the index, and the fund has a substantially larger yield than the index, so it received a boost from that. Overall, most income-focused investors (or any investors, really) are quite likely to find this performance very attractive. Despite the fund's strong recent performance, we should take a closer look at its portfolio positioning and financial condition before making an investment in it. After all, past performance is no guarantee of future results. As roughly ten months have passed since our previous discussion, it is logical to assume that quite a few things have changed that we should discuss today. The remainder of this article will focus specifically on this task. According to the fund's website, the Eaton Vance Enhanced Equity Income Fund has the primary objective of providing its investors with a very high level of current income. This is a surprising objective for an equity closed-end fund, due simply to the fact that equities are not generally considered to be income vehicles. We can see this very simply by looking at the yields of the major U.S. stock market indices: (All figures from the Wall Street Journal.) As of the time of writing, a money market fund yields between 5% and 5.50%. Thus, all the major domestic common stock indices have yields that are substantially below that of cash equivalents. In addition, all of these common stock indices have yields that are well below the 3.831% current yield of ten-year U.S. Treasury notes. This includes traditionally high-yielding sectors such as utilities. Thus, it does not make much sense for any equity-focused closed-end fund to be focused on a current income objective because these are not income securities. Rather, common stocks deliver the bulk of their total returns through capital appreciation. As is frequently the case with Eaton Vance funds, the website does not offer any information about how the fund will seek to achieve its objective. The fact sheet does provide a bit of information, though. This document states: The Fund invests in a portfolio of primarily large- and midcap securities that the investment adviser believes have above-average growth and financial strength and writes call options on individual securities to generate current earnings from the option premium. This does not tell us too much about the fund's strategy, although it does verify that the fund will be using a covered call strategy. As I pointed out in various previous articles, this is a strategy that can be used to boost the effective yield earned by a common equity portfolio. The option premium can be a fairly high percentage of the stock's price. For example, in this article, I showed how a covered call-writing strategy could essentially turn Microsoft (MSFT) into a 12.46%-yielding stock. When we consider this, the fund's income objective does make more sense. However, the fact sheet's strategy description is not as detailed as we might like. After all, it does not tell us whether the fund is writing at-the-money or out-of-the-money calls, nor does it tell us how much of the fund's portfolio will be used as backing for covered calls. This is important because it is possible for a fund to sacrifice all the potential capital gains using a covered call-writing strategy. That would basically remove all the inflation protection that we want from a fund like this. Fortunately, the fund's most recent annual report offers a much better description of the fund's strategy. Here is what this document states: The Fund pursues its investment objectives by investing primarily in a portfolio of mid- and large-capitalization common stocks. Under normal market conditions, the Fund seeks to generate current earnings from option premiums by selling covered call options on a substantial portion of its portfolio securities. Under normal market conditions, the Fund invests at least 80% of its total assets in common stocks. The Fund generally invests in common stocks on which exchange traded call options are currently available. The Fund invests primarily in common stocks of U.S. issuers, although the Fund may invest up to 10% of its total assets in securities of foreign issuers, including American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts. Under normal market conditions, the Fund pursues its primary investment objective principally by employing an options strategy of writing (selling) covered call options on a substantial portion of its portfolio securities, although on up to 5% of the Fund's net assets, the Fund may sell the stock underlying a call option prior to purchasing back the call option. Such sales shall occur no more than three days before the option buy back. The extent of option writing activity will depend upon market conditions and the Adviser's ongoing assessment of the attractiveness of writing call options on the Fund's stock holdings. Writing call options involves a tradeoff between the option premiums received and reduced participation in potential future stock price appreciation. Depending on the Adviser's evaluation, the Fund may write call options on varying percentages of the Fund's common stock holdings. The Fund seeks to generate current earnings from option writing premiums and, to a lesser extent, from dividends on stocks held. The Fund may, in certain circumstances, purchase put options on the S&P 500 and other broad-based security indices deemed suitable for this purpose, and/or on individual stocks held in its portfolio or use other derivative instruments to help protect against a decline in the value of its portfolio securities. This explains a lot, including verifying that the covered call strategy is the reason the fund has a current income objective. Perhaps the most critical thing here, though, is that the percentage of the fund's securities that might be called away by the counterparty to its call options trades varies from time to time. This is an entirely unique animal from something like the Global X S&P 500 Covered Call ETF (XYLD) that always maintains a 100% overwrite position. Generally speaking, we want a fund to not be writing options against its entire portfolio because we want to be able to benefit from the capital appreciation as an inflation hedge. The fact sheet states that 48% of the fund's portfolio had options positions written against it as of June 30, 2024. This is actually a fairly low percentage when compared to some of the fund's peers: (All figures are per the most recent fact sheet, website date, or holdings report available as of August 28, 2024.) As we can see, most of the peer funds have a higher overwrite percentage than the Eaton Vance Enhanced Equity Income Fund as of today. This basically means that the fund is less reliant on the options premiums than on capital appreciation to generate a return. This is ideal for an inflation hedge, although it might result in this fund having slightly lower income than its peers. In my last article on this fund, I showed that the Eaton Vance Enhanced Equity Income Fund has a substantial percentage of its assets invested in a handful of mega-cap U.S. technology companies. This remains the case today, as can be clearly seen by looking at the largest positions in the fund: We see outsized positions to Microsoft, Nvidia (NVDA), Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG) (GOOGL), Meta Platforms (META), and Broadcom (AVGO) here. These seven companies account for fully 40.69% of the fund's net assets. This is terrible for diversification, especially since most of these companies are also held among the largest positions in many other funds. As such, those investors who have significant holdings of other domestic common stocks may want to think long and hard about adding this fund to their portfolios. It does not appear that it will do much to help achieve diversification. In fact, as we can see here, this fund's weightings to these companies are actually higher than that of the S&P 500 Index: (Alphabet's S&P 500 Index weighting is the total of both the Class A and Class C shares.) Thus, the conclusion is that the Eaton Vance Enhanced Equity Income Fund is even more dependent on the performance of a small handful of companies than the S&P 500 Index right now. Thus, adding this fund to a portfolio that already includes an S&P 500 index fund (or indeed most other domestic equity funds) will actually increase the impact that the performance of these technology stocks will have on the portfolio as a whole. This is not really the best situation for risk-averse investors, especially if generative artificial intelligence proves unable to live up to the current hype and is merely a bubble. There might be some reasons to believe that this is the case, as the current hopes that it will replace hundreds of millions of jobs will result in an economic catastrophe if that many people really do lose their incomes. The fact sheet confirms that the fund is overweight to the technology sector compared to the S&P 500 Index: As we can see here, the fact sheet claims that the fund's allocation to the information technology sector is 33.60% of its assets, compared to 32.45% in the S&P 500 Index. That is a substantial increase over the 27.84% weighting that the fund had to this sector the last time that we discussed it. This is even worse from a diversification perspective, as it clearly shows that the fund's portfolio performance (as well as that of the index) is becoming even more dependent on just a handful of companies. It is worth noting though that this begs some questions. The most notable of these is that the fact sheet's weighting seems questionable. In order for this fund to have 33.90% of its assets in the technology sector, then at least one of Microsoft, Nvidia, Apple, Amazon, Alphabet, or Meta Platforms cannot be considered a technology company. After all, we already saw that the website's own weightings for these companies total 38.00%. The fund's semi-annual report states that Amazon is a retailer and not a technology company. That could account for the discrepancy here, but I have never heard anyone legitimately claim that Amazon is not an information technology company. There has only been one company removed and replaced from the fund's largest holdings list since the last time that we discussed it. This is that Mastercard (MA) was removed and replaced with Broadcom. The remaining nine companies that are currently on the list were on it the last time that we discussed the fund, although some weightings have changed. That might simply be the result of one company outperforming another in the market, and need not be due to the fund actually buying and selling stocks to change its weightings. This could lead one to believe that this fund has a fairly low annual turnover. The semi-annual report states that the fund had a 25% turnover in the first half of the current fiscal year. That annualizes to 50%, which would be relatively in line with what the fund had in past fiscal years: That is not especially high for an equity closed-end fund, but I will admit that I expected to see it lower given the lack of significant changes to the fund's largest positions list over the past ten months. It is possible that most of the changes are taking place among the fund's smaller positions, however. The primary objective of the Eaton Vance Enhanced Equity Income Fund is to provide its investors with a very high level of current income. To this end, the fund pays a monthly distribution of $0.1338 per share ($1.6056 per share annually). This gives the fund an 8.23% yield at the current price, which as we have already seen is reasonably attractive relative to its peers. Unfortunately, the Eaton Vance Enhanced Equity Income Fund has not been especially reliable with its distribution over the years. This is shown here: The fund's lack of reliability mostly comes from a series of distribution cuts that followed the financial crisis and the Great Recession. However, from the previous article: As we can see, the fund has generally increased its distribution over the past decade. This is much nicer than Eaton Vance's other option-income funds, some of which have had to cut their distributions in response to losses that they took in the reversal of the long-standing loose monetary policy in 2022. We certainly want to have a close look at the finances of this fund though, since it seems a bit unlikely that it would be able to avoid losses from 2022's bear market. This is especially true since a covered call strategy only provides partial protection against a market decline (the premiums offset some of the share price declines). The Eaton Vance Enhanced Equity Income Fund continued its recent trend of distribution hikes earlier this year, as the fund raised its distribution by 22.19% in April. That is another thing that is very nice to see for an inflation hedge, at least assuming that the fund can sustain the new higher distribution. As of the time of writing, the fund's most recent financial report is the semi-annual report corresponding to the six-month period that ended on March 31, 2024. A link to this report was provided earlier in this article. This is obviously a much newer report than the one that was available to us the last time that we discussed this fund, which is quite nice to see, as it should give us a much better idea of how well this fund is covering its payouts. For the six-month period that ended on March 31, 2024, the Eaton Vance Enhanced Equity Income Fund received $3,932,996 in dividends net of foreign tax withholding. The fund had no investment income from any other source, so its total investment income also was $3,932,996. The fund paid its expenses out of that amount, which left it with $72,611 available for shareholders. That was not sufficient to cover the $26,521,103 that the fund paid out in distributions during the period. Fortunately, the fund was able to make up the difference through capital gains. For the six-month period that ended on March 31, 2024, the Eaton Vance Enhanced Equity Income Fund reported net realized gains of $34,976,246 along with $115,304,573 in net unrealized gains. Overall, the fund's net assets increased by $123,832,327 after accounting for all inflows and outflows during the period. The fund managed to cover its distributions fully with net realized gains alone. It was even able to do that and have some additional realized gains left over for later distribution. When combined with the net unrealized gains, we can clearly see that this fund should be in good shape to cover its distributions unless a severe market crash occurs. As such a crash seems unlikely, we can conclude that investors in this fund should not need to worry about its ability to keep paying the distribution. It should be able to sustain the current payout for a while. Shares of the Eaton Vance Enhanced Equity Income Fund are currently trading at a 3.65% discount to net asset value. This is a much more attractive price than the 1.69% discount that the fund's shares have had on average over the past month. It is worth noting that the fund had a 4.58% discount the last time that we discussed the fund. Thus, as I suspected in the introduction, the fund's shares have been performing better than the portfolio itself. If this continues, it might push the fund to a premium, and that is generally too expensive to be worth considering. For now, though, it is still possible to get shares of this fund for less than the assets underlying them are actually worth. In conclusion, the Eaton Vance Enhanced Equity Income Fund is a very good-performing covered call fund that offers a higher level of income than could be obtained via a straight equity portfolio. However, it appears that one of the ways that this fund has achieved such performance is by investing heavily in the handful of technology stocks that have been driving much of the market's performance year-to-date. As such, the fund is not nearly as diversified as most risk-averse investors would prefer. However, it could be a good addition to an income portfolio today, as long as the securities that comprise the rest of the portfolio are structured in a way that results in reasonable diversification.