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Summary

  • CEFL declared a monthly dividend for May of $0.2780.
  • The key to maintaining the high yield for CEFL in the future is the continuation of extremely low levels of short-term interest rates.
  • On a monthly compounded basis, the effective annualized yield is 18.1%.

ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) declared a monthly dividend for May of $0.2780. This is $0.0172 higher than my projection of $0.2608 in: Projected May Dividend For CEFL To Bring Yield To 17.9%. The May dividend of $0.2780 is an increase 13% from the February 2014 dividend of $0.2461, which is the most useful comparison.

There are 30 components that comprise the index upon which CEFL is based. As is shown in the table below, of those 30, there are 8 that pay dividends quarterly, while the other 22 pay dividends monthly. None of the 8 quarterly payers went ex-dividend in April 2014. Thus, they were not included in the May 2014 CEFL monthly dividend.

The mix of monthly and quarterly dividends creates a "big month/small month" phenomena similar to that described in 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory. However, the phenomena is much less pronounced for CEFL than for ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL) since most of the components of MORL are quarterly payers.

The reason for the higher May dividend relative to my projection appears to be primarily the result of my treatment of the interest and tracking fee expenses. They did not reduce the dividend in the manner I included in my calculations. Also, there was a slight improvement in the indicative value, which does impact the level of dividends.

As I indicated in:MORL's Net Asset Value Rises - Implications For The Dividends, an increase in the net asset value of a 2X leveraged ETN results in a commensurate increase in the dividend as the leverage is rebalanced.

The key to maintaining the high yield for CEFL in the future is the continuation of extremely low levels of short-term interest rates. The dividends paid by CEFL are close to double what they would be if CEFL used no leverage, or if the yields on the component closed-end funds were equal to the short-term LIBOR based rate that is used to compute the borrowing cost for CEFL. Furthermore, the dividends paid by major components of CEFL that employ leverage are themselves somewhat dependent on a relatively steep yield curve and would be less in a flat yield curve environment.

Some of the components of CEFL, such as the Eaton Vance Tax-Managed Buy-Write Opportunities Fund (NYSE:ETV), write covered call options to generate income. An increase in short-term interest rates does increase the theoretical value of call options. That might actually increase the income and thus the dividends of those closed-end funds employing buy-write strategies. However, the positive effect on option premiums might be more than offset by higher borrowing costs where leverage is employed.

The $0.2780 May 2014 CEFL dividend results in a total of the dividends for the most recent three months of $1.1871. This is a 16.8% simple annualized yield with CEFL priced at $28.29. On a monthly compounded basis, the effective annualized yield is 18.1%.

If someone thought that over the next five years markets would remain relatively stable and thus CEFL would continue to yield 18.1% on a compounded basis, the return on a strategy of reinvesting all dividends could be enormous. An investment of $100,000 would be worth $230,118 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,100 initial annual rate to $41,651 annually.

CEFL

5/2/2/14

wgt

ex-div

pay

div

freq

GGN

GAMCO Global Gold, Natural Resources & Income Trust

$10.21

4.60%

5/13/2014

5/22/2014

0.09

m

PHK

PIMCO High Income Fund

$12.87

4.36%

5/8/2014

6/2/2014

0.12

m

IGD

Voya Global Equity Dividend and Premium Opportunity Fund

$9.40

4.29%

5/1/2014

5/15/2014

0.08

m

NFJ

AllianzGI NFJ Dividend Interest & Premium Strategy Fund

$18.62

4.25%

3/13/2014

3/28/2014

0.45

q

BCX

BlackRock Resources & Commodities Strategy Trust

$12.05

4.25%

3/12/2014

3/31/2014

0.23

q

ETY

Eaton Vance Tax-Managed Diversified Equity Income Fund

$11.35

4.23%

4/21/2014

4/30/2014

0.08

m

ETV

Eaton Vance Tax-Managed Buy-Write Opportunities Fund

$14.55

4.20%

4/21/2014

4/30/2014

0.11

m

MIN

MFS® Intermediate Income Fund

$5.31

4.17%

5/13/2014

5/30/2014

0.04

m

AOD

Alpine Total Dynamic Dividend Fund

$8.57

4.17%

5/20/2014

5/30/2014

0.06

m

EXG

Eaton Vance Tax-Managed Global Diversified Equity Income Fund

$10.23

4.16%

4/21/2014

4/30/2014

0.0813

m

BGY

BlackRock International Growth & Income Trust

$8.15

4.12%

3/12/2014

3/31/2014

0.17

q

ETW

Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund

$12.34

4.12%

4/21/2014

4/30/2014

0.0973

m

BOE

BlackRock Global Opportunities Equity Trust

$14.92

4.09%

5/13/2014

5/30/2014

0.3117

q

ETJ

Eaton Vance Risk-Managed Diversified Equity Income Fund

$11.26

4.07%

4/21/2014

4/30/2014

0.09

m

JGT

Nuveen Diversified Currency Opportunities Fund

$10.82

4.04%

3/12/2014

4/1/2014

0.21

q

GAB

Gabelli Equity Trust

$7.49

3.92%

3/13/2024

3/12/2014

0.15

q

PTY

PIMCO Corporate and Income Opportunity Fund

$18.51

3.79%

5/8/2014

6/2/2014

0.13

m

BIT

Blackrock Multi-Sector Income Trust

$18.26

3.55%

5/13/2014

5/30/2014

0.12

m

BTZ

BlackRock Credit Allocation Income Trust

$13.74

3.29%

5/13/2014

5/30/2014

0.08

m

FFC

Flaherty & Crumrine Preferred Securities Income Fund

$19.95

3.10%

4/23/2014

4/30/2014

0.136

m

ESD

Western Asset Emerging Markets Debt Fund Inc

$18.02

3.08%

5/23/2014

5/30/2014

0.12

m

LDP

Cohen & Steers Limited Duration Preferred and Income Fund, Inc

$24.83

2.84%

5/14/2014

5/30/2014

0.156

m

EVV

Eaton Vance Limited Duration Income Fund

$15.44

2.35%

5/8/2014

5/19/2014

0.1

m

JSN

Nuveen Equity Premium Opportunity Fund

$12.84

2.15%

3/12/2014

4/1/2014

0.254

q

CII

BlackRock Enhanced Capital and Income Fund Inc

$14.29

2.00%

3/12/2014

3/31/2014

0.3

q

Source: Projected May Dividend For CEFL To Bring Yield To 17.9%, linked above.

Source: Higher May CEFL Dividend Brings Yield To 18.1%