As you know, I search far and wide to bring you unusual, high-yielding investment opportunities. And for this week’s Dividend Pro recommendation, I’ve found an especially interesting opportunity that takes you back into the world of Business Development Companies (BDCs).
Think of BDCs as private equity or venture capital funds that pay out their profits directly to their investors on a quarterly basis. Much like REITs, BDCs must distribute 90% of investment income, with income distributed from interest on loans taxed as ordinary income and stock dividends taxed at a lower rate.
This week’s Dividend Pro pick — the UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL) — tracks the performance of 26 Business Development Companies that are listed on the New York Stock Exchange or NASDAQ.
The Wells Fargo Index includes many of the usual suspects in the BDC world: Ares Capital (ARCC), American Capital (ACAS), Apollo Investment (AINV), and Fifth Street Finance (FSC), as well as current Dividend Pro holding Prospect Capital (PSEC).
But BDCL adds a twist. By leveraging your investment by 2X, for every dollar of BDC stock it buys, the BDCL borrows another dollar. Given that most BDCs are paying relatively high dividends of 8%-9%, BDCL yields a whopping 14.34% — one of the highest-yielding instruments you can find. The 2X leverage means that will you will also benefit twice as much from a rise in the Wells Fargo Business Development Company Index.
And that’s where the real upside may be. Even as the broader U.S. indexes languished, the Wells Fargo Business Development Company Index recently broke out of a long time trading range, leaving the broader U.S. indices in the dust.
Combine a high yield, with a strong underlying index, throw in 2x leverage… and you have the makings of a potentially huge — if volatile — winner in the months ahead.
So, buy UBS E-TRACS 2x Wells Fargo Bus Dv Cm ETN (BDCL) at market today and place your stop at $17.50.
Portfolio Update
Global X SuperDividend ETF (SDIV) fell 1.57% in sympathy with global markets. The risk of investing in high-yield equities is the possibility that the dividends are not sustainable. Fortunately, GlobalX will screen, once a quarter, for companies that might cut their dividends, reducing that risk. Slipping below its 50-day moving average, SDIV is back to a HOLD.
Two Harbors Investment Corp. (TWO) rose 1.17%. The $0.40 dividend is payable on July 20, 2012, to common stockholders of record at the close of business on June 22, 2012. TWO yields 15.4% and carries a price/earnings (P/E) ratio of 8.9, making it attractive at these levels. Back above its 50-day moving average, TWO is a BUY.
American Capital Agency Corp. (AGNC) recovered strongly, rising 2.46%. The stock went ex-dividend yesterday, June 27. You’ll be getting a cash dividend of $0.556 per share on July 16, 2012, to preferred shareholders of record as of July 1, 2012. With a dividend yield of 15.5% and a beta of 0.2, AGNC remains a BUY.
Prospect Capital Corporation (PSEC) slipped 0.53% last week. With a dividend yield of 10.8%, and a P/E ratio of 6.69, PSEC is a BUY.
iShares FTSE NAREIT Mortgage REIT (REM) recovered 0.72% over the past week. You received your dividend of $0.44 on Monday, June 25. Now trading above its 50-day moving average, REM is back to a BUY.
PIMCO Municipal Income Fund II (PML) jumped 1.57% last week, unfazed by the potential fall out from the bankruptcy of Stockton, Calif. This bet on municipal bonds remains a BUY.
