A Leveraged Bet on MPLs Yielding 10.12%

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This week’s Dividend Pro recommendation expands your sources of high-yield income in the red-hot master limited partnership sector.

You already own a master limited partnership (MLP) sector in the form of Vanguard Natural Resources (VNR), currently paying an impressive yield of 8.3%.

This week’s Dividend Pro recommendation — UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) — is another profitable way to increase your bet on this same sector.

MLPL is designed to track a 2x leveraged investment in the Alerian MLP Infrastructure Index, which itself is based on 25 energy infrastructure MLPs. The majority of these publicly traded MLPs operate in the energy infrastructure industry, owning and operating assets such as natural gas or crude oil pipelines.

The large number of companies underlying MLPL gives you the benefit of diversification, so you are not tied to the fate of a single company. That said, MLPL is fairly concentrated with its two largest holdings, Kinder Morgan Energy Partners LP (KMP) and Enterprise Products Partners LP (EPD), together accounting for close to 20% of the Index.

As you recall, MLPs are legally required to pay out 90% of their earnings, and historically have provided relatively high dividend yields. As a leveraged vehicle, MLPL magnifies this already high yield on the underlying basket of MLPs. That’s the secret behind MLPL’s annual yield of 10.12%.

As you may know, exchange-traded notes (ETNs) that are leveraged have a reputation for being wildly volatile. This is because most ETNs are re-set on a daily basis. MLPL has alleviated some of that risk as its leverage is reset monthly, not daily. This should make it slightly less volatile. That said, MLPL may still offer a more volatile ride than you are used to seeing. So you may want to take a smaller position size than you do normally.

Another bonus is that based on its (short) history, MLPL should announce its quarterly distribution sometime by the end of next week. These distributions have been between 96 cents to $1.11 per unit. This also means you can expect MLPL to pull back next week by approximately the amount of that payment, as it goes ex-dividend.

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So buy the UBS E-TRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL) at market today, and place your stop at $37.25. There are no options on this one.

Full disclosure: This is a position that I hold on behalf of my clients at my investment firm Global Guru Capital.

Portfolio Update

Global X SuperDividend ETF (SDIV) dropped another 0.86% this past week as global markets continued to consolidate. SDIV paid out a higher than usual monthly dividend of 19.5 cents per share on Oct. 1. Although SDIV’s 12-month dividend yield is up to 8.92%, because it is trading below its 50-day moving average (MA), SDIV is a HOLD.

Two Harbors Investment Corp. (TWO) recovered a solid 2.67% this week, resuming its upward path. Since I recommended the stock on April 18, TWO is up 15.7%. Since then, you have also collected $0.76/share in dividends, so you are currently up 23% on your purchase on a total return basis. TWO is a BUY.

American Capital Agency Corp. (AGNC) rose 1.65%. A dividend of $1.25 is payable on Oct. 26 to shareholders of record as of Sept. 21. Rising back above its 50-day MA, AGNC is a BUY.

Prospect Capital Corporation (PSEC) was flat this week. The company declared its usual monthly dividend of 10.6 cents on Sept. 26. Technically oversold, and due for a bounce, PSEC is a BUY.

iShares FTSE NAREIT Mortgage REIT (REM) rose 1.00% this week. REM is composed of 28 mortgage REITs, one industrial office REIT, and a small percentage in S-T securities. With the Fed firmly committed to a low-interest rate environment, I would expect the REITs to continue to perform well for the next two years. Trading above its 50-day MA, REM’s current yield is 11.28% and it remains a BUY.

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PIMCO Municipal Income Fund II (PML) rose another 0.38%. PML declared its normal 6.5-cent monthly dividend yield on Oct. 1. Back above its 50-day MA, PML is a BUY.

UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) recovered 1.37%, after last week’s sharp fall. Yielding 13.43%, BDCL remains a BUY.

Apollo Investment (AINV) recovered 1.30% after last week’s drop. AINV is paying out a dividend of 20 cents on Oct. 4. Still trading below its 50-day MA, AINV is a HOLD.

Omega Healthcare Investors Inc. (OHI) steadied last week, rising 0.83%. With the stock as oversold as it has been since March, I would expect this to bounce strongly over the next few weeks. Nevertheless, with the stock still below its 50-day MA, OHI remains a HOLD.

PowerShares Preferred (PGX) rose 0.61%. Yielding over 6.4%, this monthly income payer is now back above its 50-day MA and is a BUY.

Fifth Street Finance Corp. (FSC) bounced 1.11%. The company has committed to its monthly dividend payout through February 2013. Still trading near its 52-week high, and boasting an 11% yield, FSC remains a BUY.

PowerShares Emerging Mkts Sovereign Debt (PCY) jumped 1.64%, as investors continue to hunt the globe for yield. As the price goes up, the yield goes down. Yielding just 4.83%, this monthly income payer remains a BUY.

Vanguard Natural Resources (VNR) jumped 0.21%. Its monthly dividend of $0.20 will be payable on Oct. 15 — a yield of approximately 0.70% per month. VNR is back to a BUY.

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CVR Partners, LP (UAN) tumbled 3.47% this past week. The company will release its third quarter 2012 earnings on Monday, Nov. 5, after the close of New York Stock Exchange trading. Slipping below its 50-day MA, UAN is now a HOLD.

PowerShares S&P 500 BuyWrite Portfolio (PBP) bounced 1.01%. Yielding comfortably more than 10% and back above its 50-day MA, PBP is now a BUY.

Rentech Nitrogen Partners, L.P. (RNF) ended the week down 3.13%. Although the stock is expensive by current measures, its forward P/E of 12 actually makes it cheaper than its rivals, based on the company’s earnings. The company will announce earnings on Dec. 10. Still trading above its 50-day MA, and yielding 11.90%, RNF remains a BUY.

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