Seeking Alpha
Debt, REITs, macro, ETF investing
Profile| Send Message|
( followers)  

Summary

  • I have projected a dividend for CEFL of $0.3095 for August 2014, and have included all of the intermediate numbers and calculations I used in arriving at that figure.
  • A number of readers have requested that the intermediate numbers and calculations be included in my articles. This will allow astute readers to check my figures and spot possible errors.
  • Based on my projections, CEFL will be yielding 18.4% on a monthly compounded basis.

The 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 August 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. None of the 9 quarterly payers went ex-dividend in July 2014. Thus, they will not be included in the August 2014 CEFL monthly dividend 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 UBS 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 so far, 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.

The January, April, October and July, "big-month" CEFL dividends are larger than the "small-month" dividends paid in the other months, since nine of the portfolio components pay quarterly, typically with ex-dates in the last month of the quarter and payment dates in the first month of the next quarter.

A number of people have requested in comments on my articles where I have projected dividends for various securities that I include all of the calculations and intermediate numbers that I used to arrive at my projections. Previously, I have not done so because on some browsers and with small screens, only a limited number of columns will show up. Those complaining about the lack of all intermediate numbers in my articles were proven correct when an error in the calculations resulted in a miss in the estimates for the dividends that MORL and MORT would pay in July. Possibly, if all of the intermediate numbers were shown in the article: "MORL's July Dividend Projected To Increase Significantly - Yield To Be 24.5% On A Monthly Compounded Basis", astute readers could have spotted the error and it could have been corrected. Thus, I will now include every intermediate step, number and calculation. My projection of an all-time high CEFL monthly dividend of $0.61 in July 2014 was fairly accurate, as the actual July CEFL monthly dividend was $0.6083.

The table below shows the weight, the price as of July 18, 2014, ex-date, pay date, dividend, imputed value and the imputed number of shares for all of the 30 CEFL components. Additionally, for the 21 components that have ex-dates in July, the imputed gross dividends are shown.

The calculation of the August CEFL dividend begins with a computation of the total assets of the portfolio. This is done by multiplying the net asset value of CEFL on July 18, 2014 of $29.2348 by the shares outstanding of 6,000,000, and multiplying that product by 2X to account for the 2X leverage. This results in a net asset total of $351.8176 million.

For each of the 21 components with ex-dates in July, a value of the holding is computed by multiplying the weight of the component by the net asset total of $351.8176 million. For GAMCO Global Gold, Natural Resources & Income Trust (NYSEMKT:GGN), with a weight of 4.96%, this results in a value of $17.40055 million. Dividing the value of $17.40055 million by the $10.97 share price of GGN results in an imputed share count of 1.5862 million. Multiplying the imputed share count of 1.5862 million by the dividend of $0.09 gives an imputed gross dividend of $0.142757 million.

This calculation is done for the other 20 components that have July ex-dates, and is shown on the table below. The imputed gross dividends for all 21 are added up to give a total of $1.857107 million. This is divided by the number of shares, 6,000,000 to give a projected dividend for the month of August 2014 of $0.3095.

The projected dividend for the month of August 2014 of $0.3095 is an 11.3% increase from the May 2014 small-month dividend of $0.278. For the three months ending August 2014, the total projected dividends are $1.2478. That would be a 2.59% increase over the three months ending August 2014, which had dividends totaling $1.2163.

None of the components of CEFL have changed their dividend amounts in the last periods for which they have declared dividends. The increase in CEFL's dividend comes slightly from changes in the weights of the components and more from changes in the total net asset value. An increase in the net asset value of CEFL would increase the dividend, even without any change in the dividends paid by the component closed-end funds. This effect has caused the dividend paid by CEFL to generally increase (adjusted for big- and small-month effects) over the last seven months since inception. The relationship between the net asset value of a 2X leveraged ETN and the dividend is explained more fully in: "MORL's Net Asset Value Rises - Implications For The Dividends".

If the projection of $0.3095 for the August 2014 CEFL dividend is accurate, the annualized dividends based on the most recent three-months ending in August 2014 would be $4.9912. This is a 17.0% simple annualized yield, with CEFL priced at $29.33. On a monthly compounded basis, the effective annualized yield is 18.4%.

If someone thought that over the next five years, interest rates and economic conditions would remain relatively stable and thus CEFL would continue to yield 18.4% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $232,773 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,400 initial annual rate to $42,830 annually.

CEFL July 18WeightPriceEx-divPay DateDividendFrequencyValue $milImputed SharesDividend
GGNGAMCO Global Gold, Natural Resources & Income Trust4.96%$10.979/12/20149/23/20140.09m17.400551.58620.142757
PHKPIMCO High Income Fund4.50%$13.487/9/20148/1/20140.1219m15.786791.17110.14276
IGDVoya Global Equity Dividend and Premium Opportunity Fund4.33%$9.708/1/20148/15/20140.076m15.19041.56600.119018
ETYEaton Vance Tax-Managed Diversified Equity Income Fund4.33%$11.907/22/20147/31/20140.0843m15.19041.27650.107609
BCXBlackRock Resources & Commodities Strategy Trust4.25%$12.336/12/20146/30/20140.2312q14.909751.2092 
ETWEaton Vance Tax-Managed Global Buy-Write Opportunities Fund4.22%$12.897/22/20147/31/20140.0973m14.80451.14850.111752
AODAlpine Total Dynamic Dividend Fund4.22%$8.938/20/20148/29/20140.0565m14.80451.65780.093668
NFJAllianzGI NFJ Dividend Interest & Premium Strategy Fund4.21%$18.926/12/20146/27/20140.45q14.769420.7806 
ETVEaton Vance Tax-Managed Buy-Write Opportunities Fund4.21%$14.927/22/20147/31/20140.1108m14.769420.98990.109682
EXGEaton Vance Tax-Managed Global Diversified Equity Income Fund4.13%$10.437/22/20147/31/20140.0813m14.488771.38910.112937
MINMFS® Intermediate Income Fund4.10%$5.337/15/20147/31/20140.0396m14.383522.69860.106864
JGTNuveen Diversified Currency Opportunities Fund4.09%$11.246/11/20147/1/20140.195q14.348441.2766 
ETJEaton Vance Risk-Managed Diversified Equity Income Fund4.08%$11.597/22/20147/31/20140.093m14.313361.23500.114853
BGYBlackRock International Growth & Income Trust4.03%$8.076/12/20146/30/20140.1679q14.137951.7519 
BOEBlackRock Global Opportunities Equity Trust4.03%$14.995/13/20145/30/20140.3117q14.137950.9432 
GABGabelli Equity Trust3.82%$7.396/12/20146/23/20140.15q13.401231.8134 
PTYPIMCO Corporate and Income Opportunity Fund3.73%$18.557/9/20148/1/20140.13m13.08550.70540.091704
BITBlackrock Multi-Sector Income Trust3.52%$18.337/11/20147/31/20140.1167m12.348780.67370.07862
BTZBlackRock Credit Allocation Income Trust IV3.24%$13.737/11/20147/31/20140.0805m11.366490.82790.066643
ESDWestern Asset Emerging Markets Debt Fund Inc3.06%$18.248/20/20148/29/20140.12m10.735020.58850.070625
FFCFlaherty & Crumrine/Claymore Preferred Securities Income Fund2.99%$19.697/22/20147/31/20140.136m10.489450.53270.072451
LDPCohen & Steers Limited Duration Preferred and Income Fund, Inc2.79%$25.097/16/20147/31/20140.156m9.7878110.39010.060857
EVVEaton Vance Limited Duration Income Fund2.28%$15.307/9/20147/18/20140.1017m7.9986410.52280.053167
JSNNuveen Equity Premium Opportunity Fund2.05%$12.726/11/20147/1/20140.254q7.1917610.5654 
CIIBlackRock Enhanced Capital and Income Fund Inc2.03%$15.026/12/20146/30/20140.3q7.1215970.4741 
BCFBlackRock Real Asset Equity Trust1.81%$9.386/12/20146/30/20140.1748q6.3497990.67700.118331
FAXAberdeen Asia-Pacific Income Fund Inc1.59%$6.247/17/20147/29/20140.035m5.5780.89390.031287
BDJBlackRock Enhanced Equity Dividend Trust1.35%$8.416/12/20146/30/20140.14q4.7360380.5631 
PFNPIMCO Floating Rate Strategy Fund1.16%$10.877/9/20148/1/20140.08m4.0694840.37440.02995
ERCWells Fargo Advantage Multi-Sector Income Fund0.91%$14.807/11/20148/1/20140.1m3.192440.21570.021571

Source: CEFL August Dividend Projected To Bring Yield To 18.4%