A Leveraged Bet on U.S. Economic Recovery That Yields 13.45%

Nicholas Vardy

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

With the U.S. Congress averting the “fiscal cliff” for now, markets across the globe are rallying sharply.

And with tax increases on dividend payments now clarified and limited mostly to high-income investors, the cloud of uncertainty surrounding certain of your Dividend Pro holdings now has cleared. As a result, I expect that you’ll see a strong bounce in many of your Dividend Pro holdings.

This week’s Dividend Pro recommendation, the UBS E-TRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (BDCL), is a bet on the slowly-but-surely recovering U.S. economy.

BDCL tracks the performance of 26 Business Development Companies (BDCs) that are listed on the New York Stock Exchange or NASDAQ. BDCs help develop companies in exchange for money or equity and often offer loans, too. In that way, they act as alternatives to banks.

The Wells Fargo Index includes many of the usual suspects in the BDC world: Ares Capital (ARCC), American Capital (ACAS), Apollo Investment (AINV), as well as current Dividend Pro holding Fifth Street Finance (FSC).

Here’s why I think BDCL will do well in the months ahead. The U.S. economy is finally recovering, even if more slowly than we’d like. Yes, much of this is artificial, and carries with it potentially negative consequences over the long term. But the Fed will continue to buy mortgage-backed securities as it has been doing since quantitative-easing part III (QE3), which in turn will continue to keep mortgage rates down. This frees up cash for homeowners, which puts money in people’s pockets. This also supports home prices, which are now steadily rising.

The track record of BDCs is very strong in growing economies. In fact, there were only two BDCs out of around 20 that reduced their dividend from one quarter to the next between 2003 and 2007, and none eliminated their dividends altogether.

And BDCL adds a twist to all of this. By leveraging your investment by 2X, for every dollar of BDC stock it buys, the BDCL borrows another dollar. Given that many BDCs are paying relatively high dividends of 8%-9%, BDCL yields a whopping 13.45% — one of the highest-yielding instruments you can find. The 2X leverage means that you will also benefit twice as much from a rise in the Wells Fargo Business Development Company Index.

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And that’s where the real upside may be. 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. If you are more conservative and prefer a non-leveraged bet, look to the UBS ETRACS Wells Fargo Business Development Company ETN (BDCS).

So, buy UBS E-TRACS 2x Wells Fargo Bus Dv Cm ETN (BDCL) at market today and place your initial stop at $20.50.

Portfolio Update

Global X SuperDividend ETF (SDIV) rose another 1.4% last week. SDIV declared a monthly distribution of 30 cents per unit on Dec. 27. Trading back above its 50-day moving average (MA), SDIV is a BUY.

Two Harbors Investment Corp. (TWO) dropped 1.11% this past week. The stock is trading now ex-dividend, for its quarterly dividend of $0.55, payable on Jan. 18. As a percentage of TWO’s recent stock price of $11.54, this dividend works out to approximately 4.76%. Not bad for a single quarter. TWO remains a BUY.

PIMCO Municipal Income Fund II (PML) rose 3.28%. The tax-exempt status of municipal bonds did not change as a result of the fiscal cliff negotiations. Your monthly distribution of 6.5 cents on or about Jan. 10 remains tax free. Back above its 50-day MA, PML is now a BUY.

Apollo Investment (AINV) rose 1.31%. This position yields 9.60%, while hitting a 52-week high. Trading above its 50-day MA, AINV is a BUY.

Omega Healthcare Investors Inc. (OHI) rose 2.53%. The company provides one of the largest yields among healthcare real estate investment trusts (REITs). With the certainty provided by Obama’s re-election and thus the non-repeal of Obamacare, OHI is set to have a healthy 2013. Back above its 50-day MA, OHI is now a BUY.

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PowerShares Preferred (PGX) rose 0.82% on the week. This monthly income payer has a yield of 6.42% and is a HOLD.

Fifth Street Finance Corp. (FSC) rose 3.57%. FSC is one of the growing number of Business Development Companies that is paying a monthly dividend, and its yield is now 11% at current prices. FSC is now a BUY.

CVR Partners, LP (UAN) jumped 4.21% this past week. UAN has strong distributable cash flow growth, a sustainable high dividend yield, strong earnings growth, and is getting institutional support. Thanks to a U.S. drought, and historically low corn stocks to usage ratios, Corn Belt fertilizer manufacturer sales should rise substantially in 2013. Back above its 50-day MA, UAN is a BUY.

Rentech Nitrogen Partners, L.P. (RNF) rose 3.32%. At the moment, RNF pays $3.40 in annual cash distributions, yielding 9%. Furthermore, cash flows are in a strong position for the partnership. Trailing twelve-month operating cash flows stand at $84 million. RNF remains a BUY.

Annaly Capital Management (NLY) rose 0.56%. I believe that the decline in agency REITs is overdone. NLY’s stock repurchases program should also further help increase book value. A cash dividend of 45 cents per common share is payable on Jan. 29 to common shareholders of record on Dec. 28. The ex-dividend date is Dec. 26. With strong insider buying, NLY remains a HOLD.

Peritus High Yield ETF (HYLD) rose 0.52%. This actively managed ETF returned 12.63% during 2012 and yields 8.39%. It declared a 43.5-cent dividend on Christmas Eve. Now above its 50-day MA, HYLD is a BUY.

Northern Tier Energy Trust LP (NTI) jumped 1.61%. Chief Executive Mario Rodriguez stepped down effective on Friday and the company’s other co-founder, President and Chief Operating Officer Hank Kuchta, took the role of chief executive of the partnership. NTI remains a BUY.

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Apollo Residential Mortgage Inc. (AMTG) dropped 3.79% after going ex-dividend. Besides having the lowest prepayment rate in the industry, Apollo Residential is one of the most undervalued REITs. Shares of Apollo Residential yield a hefty 13.9% with a massive gross profit margin of 86.4%. The company declared a quarterly dividend of $0.70 per share of common stock for the fourth quarter of 2012 and a special dividend of $0.35 per share of common stock. These dividends are payable on January 31, 2013, to common stockholders of record on December 31, 2012. Slipping below its 50-day moving average, AMTG is a HOLD.

SPDR S&P Emerging Markets Dividend ETF (EDIV) jumped 3.78% as emerging markets continued on their strong seasonal run. You’re getting a 5.96% dividend yield while you’re waiting for global markets to bounce strongly. EDIV is a BUY.

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