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Summary

  • My projection is that CEFL will pay a monthly dividend of $0.61 in July 2014.
  • This will be the highest amount it has ever paid.
  • The entire increase in the monthly dividends is due to the effect of a higher net asset value on the dividends paid by a 2X leveraged ETN.
  • None of the 30 closed-end funds that comprise the index upon which CEFL is based changed their dividends from the previous period.

UBS ETRACS Monthly Pay 2x Leveraged Closed-End Fund ETN (NYSEARCA:CEFL) and YieldShares High Income ETF (NYSEARCA:YYY), which is based on the same index, and thus has the same components as CEFL, but without the 2X leverage, will soon declare monthly dividends for July 2014. There are 30 closed-end funds that comprise the ISE High Income™ Index upon which CEFL and YYY is based. As is shown in the table below, of those 30, there are 9 that pay dividends quarterly, while the other 21 pay dividends monthly. Of the 9 quarterly payers, 8 went ex-dividend in June 2014. Thus, they will be included in the July 2014 CEFL monthly dividend calculation. Only BlackRock Global Opportunities Equity Trust (NYSE:BOE) which paid a quarterly dividend in May 2014 will not be included in the monthly calculation.

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 mREIT components of MORL are quarterly payers, while most of the closed-end funds that comprise CEFL and YYY are monthly payers. YYY is a fund, not an ETN so they do not have to pay the exact dividend amount required by the terms of the note each month as CEFL must. YYY can smooth out the big month and small month dividends. Therefore, YYY has paid $0.17 every month this year and can make up any differential between their net investment income and distributions at the end of the year or other periods they choose. Thus, there is no point in trying to predict YYY's dividends on a month-to-month basis.

With CEFL, the next monthly dividend can be predicted by calculating the amounts of dividends that each of the components that will go ex-dividend in June 2014 will pay to CEFL. The amounts are the product of the number of shares of each component times the dividend per share that the component will pay. For YYY, the shares of each of the components held are published every business day. For CEFL, the shares of each of the components that are used to compute the monthly dividend amounts can be imputed. For those who may wish to replicate my calculation at home, or update the projections as market movements may change the numbers; the methodology I use was described in detail in my article: MORL Dividend Projected To Rise Sharply In April.

The table below lists the weight, ex-date, pay-date and dividend for each of the YYY and CEFL components. The latest dividend announcements are used. It should be noted that for some of the components that pay monthly, the latest announcement covers dividends that will be paid after July 2014. In those cases, the dividend that will be paid in July 2014 is used for the calculation. For example, Western Asset Emerging Markets Debt Fund (NYSE:ESD) has announced that monthly dividends will be $0.12 through August 2014. Thus, the table below indicates an ex-date for ESD of August 20, 2014.

My calculation projects that CEFL will pay a $0.61 dividend in July 2014. This is an increase of 2.7% from the $0.5941 paid in the last "big month" of April 2014. It is also the highest monthly dividend since inception in January. It is also 11.5% above the January big month dividend of $0.5471. The increase in the CEFL dividends was not the result of increases in the dividends paid by the individual components. All of the dividends shown in the table below are exactly the same as was paid in the prior periods. The reason for the dividend increase is the increase in the net asset value per share of CEFL. Higher net asset values increase the dividends paid by a leveraged instrument such as CEFL.

As the net asset value per share increases, additional amounts of the underlying closed-end funds that comprise the CEFL portfolio are added to maintain the 2X leverage, as required by the monthly rebalancing. This increases the aggregate dividends paid by the portfolio without any change in the number of CEFL shares outstanding. The relationship between the net asset value of 2X leveraged ETNs such as CEFL and the dividend is explained more fully in: MORL's Net Asset Value Rises - Implications For The Dividends. This effect can work in reverse as well, in that, if the net asset value of a 2X leveraged ETN falls due to the market prices of its components declining, the dividend paid by the 2X leveraged ETN falls even if the dividends paid by the underlying components do not decline.

The projected $0.61 July 2014 CEFL dividend results in the total for the dividends for the most recent three months of $1.22; this is $4.88 annualized and results in a 16.5% simple annualized yield with CEFL priced at $29.49. On a monthly compounded basis, the effective annualized yield is 17.8%.

If someone thought that over the next five years credit conditions would remain relatively stable and thus CEFL would continue to yield 17.8% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $227,143 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $17,800 initial annual rate to $40,431 annually.

Components by Weight for CEFL and YYY June 20, 2014

weight

Name

Ticker

ex-div

pay date

dividend

frequency

4.75%

GAMCO GLBL GOLD NAT RES

(NYSEMKT:GGN)

9/12/2014

9/23/2014

0.0900

m

4.46%

PIMCO HIGH INCOME FUND

(NYSE:PHK)

6/10/2014

7/1/2014

0.1219

m

4.26%

VOYA GLBL EQTY DIVD FUND

(NYSE:IGD)

7/1/2014

7/15/2014

0.0760

m

4.25%

BLACKROCK RESOURCE&COMMOD

(NYSE:BCX)

6/12/2014

6/30/2014

0.2312

q

4.23%

EATON VANCE TAX-MGD DV EQ

(NYSE:ETY)

6/19/2014

6/30/2014

0.0843

m

4.18%

EATON VANCE TM GLB BUY-WR

(NYSE:ETW)

6/19/2014

6/30/2014

0.0973

m

4.18%

ALPINE TOTAL DYNAMIC DIVD

(NYSE:AOD)

7/22/2014

7/31/2014

0.0565

m

4.17%

EATON VANCE TM BUY-WRT OP

(NYSE:ETV)

6/19/2014

6/30/2014

0.1108

m

4.10%

MFS INTERMED INCOME TRUST

(NYSE:MIN)

6/17/2014

6/30/2014

0.0398

m

4.07%

ALLIANZGI NFJ DIV INT&PRM

(NYSE:NFJ)

6/12/2014

6/27/2014

0.4500

q

4.05%

EATON VANCE TM GL DIV EQ

(NYSE:EXG)

6/19/2014

6/30/2014

0.0813

m

4.02%

BLACKROCK INTL GROWTH&INC

(NYSE:BGY)

6/12/2014

6/30/2014

0.1679

q

4.01%

NUVEEN DIVERSIFIED CURR

(NYSE:JGT)

6/11/2014

7/1/2014

0.1950

q

4.01%

EATON VANCE RISK-MGD DIV

(NYSE:ETJ)

6/19/2014

6/30/2014

0.0930

m

3.97%

BLACKROCK GLOBAL OPPORTUN

BOE

5/13/2014

5/30/2014

0.3117

q

3.79%

GABELLI EQUITY TRUST

(NYSE:GAB)

6/12/2014

6/23/2014

0.1500

q

3.71%

PIMCO CORP & INCOME OPP

(NYSE:PTY)

6/10/2014

7/1/2014

0.1300

m

3.52%

BLACKROCK MULTI-SECTR INC

(NYSE:BIT)

6/12/2014

6/30/2014

0.1167

m

3.19%

BLACKROCK CREDIT ALLOC IN

(NYSE:BTZ)

6/12/2014

6/30/2014

0.0805

m

3.04%

WESTERN ASSET EMG MKT DBT

ESD

8/20/2014

8/29/2014

0.1200

m

3.02%

FLAHERTY & CRUMRINE PFD

(NYSE:FFC)

6/19/2014

6/30/2014

0.1360

m

2.81%

COHEN & STEERS LTD DURAT

(NYSE:LDP)

6/18/2014

6/30/2014

0.1560

m

2.32%

EATON VANCE LIMITED DURAT

(NYSEMKT:EVV)

6/10/2014

6/19/2014

0.1017

m

2.07%

NUVEEN EQUITY PREMIUM OPP

(NYSE:JSN)

6/11/2014

7/1/2014

0.2540

q

1.99%

BLACKROCK ENHANCED CAP&IN

(NYSE:CII)

6/12/2014

6/30/2014

0.3000

q

1.78%

BLACKROCK REAL ASSET EQ

(NYSE:BCF)

6/12/2014

6/30/2014

0.1748

q

1.57%

ABERDEEN ASIA-PAC INCOME

(NYSEMKT:FAX)

6/19/2014

6/30/2014

0.0350

m

1.32%

BLACKROCK ENHANCED EQ DIV

(NYSE:BDJ)

6/12/2014

6/30/2014

0.1400

q

1.16%

PIMCO INCOME STRATEGY

(NYSE:PFN)

1/0/1900

6/10/2014

0.0800

m

0.905

WELLS FARGO ADV MULTISECT

(NYSEMKT:ERC)

6/12/2014

7/1/2014

0.1000

m

Source: CEFL To Pay The Highest Monthly Dividend Since Inception - Bringing Yield To 17.8%