Summary BDCL’s quarterly dividend paid in January 2016 is projected to be $0.8216, an increase from October 2015 . On an annualized quarterly compounded basis the yield is 21.5%. While there are problems and high fees associated with some of the business development companies, the discounts to book value and high yields make BDCL attractive. The ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ) will soon be declaring its dividend for the quarter ending December 31, 2015. The dividend will be paid in January 2016. BDCL is an exchanged-traded note that employs 2X leverage to generate exceptionally high yields. Most of the 44 Business Development Companies that comprise the index portfolio upon which BDCL is based have announced dividends with ex-dates in the fourth quarter of 2015. American Capital Ltd. (NASDAQ: ACAS ) and Harris & Harris Group Inc. (NASDAQ: TINY ) do not pay dividends. Capital Southwest Corp. (NASDAQ: CSWC ) pays semiannually and did have an ex-date in the second quarter of 2015 but has declared one since, so I did not include it in the dividend calculation. Main Street Capital Corp (NYSE: MAIN ) pays $0.18 monthly and had a $0.275 special dividend in the fourth quarter of 2015 that is included in the dividend calculation. From 41 of the 44 Business Development Companies who pay dividends with ex-dates in the fourth quarter of 2015, I projected that BDCL’s quarterly dividend paid in January 2016 will be $0.8216. This is an increase of 5.6% from the quarterly $0.7782 dividend paid in September 2015. Most of the increase is due to the increase in the indicative or net asset value of BDCL from $15.6699 on September 30, 2015 to the current $16.5565. The dividend of a leveraged ETN is impacted by the rebalancing of the portfolio each month to bring the amount of leverage back to 2X. If the value of the portfolio declines, portfolio assets must be reduced to maintain the leverage level. This reduces the dividend, is in addition to any reductions from dividend cuts by any of the components in the portfolio. Conversely, if the prices of the component securities increases, the dividend paid by the ETN will increase even if the components of the ETN do not change their dividends. That was the case in the fourth quarter of 2015. The relationship between the net asset value of MORL and the dividend is explained more fully in: MORL’s Net Asset Value Rises – Implications For The Dividends. The table below shows the weight of each of the components of the index upon which BDCL is based. The prices are as of December 23, 2015. The weights are the latest on the BDCL website. The table also shows the dividend rate, the ex-dates, and the contribution by component of the components that pay dividends. In the frequency column “q” denotes quarterly, those that pay monthly have an “m”, and the semi-annual payers are denoted by “s”. Interestingly, the second-largest component of the index upon which BDCL is based, American Capital Ltd., with a weight of 11.51%, is one the 2 components that do not currently pay any dividends. The other component that does not currently pay dividends is TINY has a weight of 0.27%. Thus, 11.78% by weight of the components of BDCL do not pay any dividends now. If CSWC, with a weight of 2.3%, which has not declared a semi-annual dividend after last doing so on 04/24/2015, is included as a non-payer, then 14.08% by weight of the components of BDCL do not pay any dividends now Some readers have asked to see the details of my dividend calculations. I have changed my procedure, and now use the contribution by component method. It should give the exact same result as my previous method that could be called the total imputed dividends divided by the number of shares outstanding method. An example of that methodology using actual numbers can be seen in the article ” MORL Yielding 24.7% Based On Projected June Dividend “. In the total imputed dividends divided by the number of shares outstanding methodology, the number of shares outstanding appears both as a numerator and a denominator. Thus, the same result can be obtained by using the contribution by component method. This method involves multiplying the net asset value of BDCL by weight of each component with an ex-date during the month prior to the month in question, and then multiplying that product by 2 to account for the 2X leverage. That product is then divided by the share price of the component. This is an imputed value for how many shares of the component each share of BDCL represents. Multiplying the shares of the component per BDCL share times the dividend declared by the component gives the contribution by component for each component. Adding all of the contributions of all of the components with an ex-date in the month prior to the month for which the dividend is being computed and adjusting for expenses, gives a projection for the dividend. The index upon which BDCL is based is a float-adjusted, capitalization-weighted index that includes the Business Development Companies listed on the major exchanges. The fact that 14.08% of the companies that comprise BDCL are not currently paying dividends can be looked at with either a “glass is half full” or “glass half empty” perspective. On the bright side, there could be considerable room for an increase in the dividends paid by BDCL if those components not presently paying dividends were to resume them. On the other hand, the fact that 14.08% of the companies that comprise BDCL are not currently paying dividends could be seen as a warning that other components in the portfolio might also suspend dividends at some point in the future. The premise for using 2x leveraged ETNs such BDCL to generate high income is that the extra income resulting from the spread between the dividends paid by the components of index upon which the ETN is based and the interest effectively paid by the ETN on the leveraged portion, should offset any declines in price by the business development companies in the index upon which BEDCL is based. With BDCL the weighted average of the dividends paid by the business development companies that comprise the portfolio is about 10% on a non-compounded basis. With 2x leverage the dividend yield on BDCL, before compounding is the 10% paid by the portfolio plus the amount generated by the leverage spread which is currently 10% less the financing expense based on three-month LIBOR, now 0.6%. Thus, before compounding, the dividend yield will be approximately 10% + 19.6% = 19.6%. While the dividend yield on BDCL has been consistently above 20%, the prices of the business development companies that comprise the index upon which BDCL is based have declined so much that for some holding periods the total return on BDCL has actually been negative. This has exacerbated with the recent general aversion to most high-yielding securities whether they be junk bonds, mREITS or high-dividend closed-end funds. With BDCL, concerns over high fees and problems with specific business development companies in the index and that sector in general have caused BDCL to underperform the equity markets in recent months. This has led many of them to trade at large discounts to book value. Computing the book value for business development companies can be problematic since many of their assets are not publicly traded. However, the higher yielding business development companies that compose the index upon which BDCL is based are generally thought be at historically large discounts to book value. This, could allow the slide in the market prices of the business development companies to reverse at some point. The relatively high yield and high beta or systematic risk is consistent with the Capital Asset Pricing Model. One wrinkle is that for investors seeking higher yields, BDCL may actually be a relatively efficient diversifier, if those investors are now heavily invested in higher-yielding instruments that are very interest rate-sensitive. Previously, I pointed out in the article ” 17.8%-Yielding CEFL – Diversification On Top Of Diversification, Or Fees On Top Of Fees? ” that those investors who have significant portions of their portfolios in mREITs, and in particular, a leveraged basket of mREITs such as the UBS ETRACS Monthly Pay 2xLeveraged Mortgage REIT ETN (NYSEARCA: MORL ), could benefit from diversifying into an instrument that was highly correlated to SPY. The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA: CEFL ) is highly correlated to SPY, while only 5% of the variation in daily returns for MORL can be explained by the daily variation in the S&P index. Since CEFL yields almost as much as MORL, this suggests that a portfolio consisting of both MORL and CEFL would have almost as much yield as a portfolio with only MORL, but considerably less risk. Adding BDCL to such as portfolio could result in a more efficient risk/return profile. There is an unlevered fund that uses the same index as BDCL — the UBS ETRACS Wells Fargo Business Development Company ETN (NYSEARCA: BDCS ). BDCS could also be a good investment for those who want higher yields and want to use their own leverage to do so. Buying BDCS on a 50% margin would return a higher, or at least comparable, yield to buying BDCL for those who could borrow at LIBOR or some similar level. Many retail investors cannot borrow at interest rates low enough to make buying BDCS on margin a better proposition than buying BDCL. However, larger investors with access to low margin rates might do better by buying BDCS on margin. Even some small investors could do better buying BDCS rather than BDCL, in some cases. For example, an investor might have $10,000 in a brokerage account in a money market fund and want to get at least some return by investing a small part of the $10,000 in BDCL or BDCS. Most brokerage firms pay just 0.01% on money market funds. The annual return on $10,000, at 0.01%, is $1 per year. If this hypothetical investor were thinking of either investing $1,000 of his $10,000 in BDCL and keeping $9,000 in the money market fund, or investing $2,000 of his $10,000 in BDCS and keeping $8,000 in the money market fund, either choice would entail the same amount of risk and potential capital gain. This is because BDCL, being 2X leveraged, would be expected to move either way twice as much as a basket of Business Development Companies, while BDCS would move in line with a basket of Business Development Companies. For this hypothetical investor, his effective borrowing cost is the rate on the money market fund. Thus, his income from the $2,000 of his $10,000 in BDCS and $8,000 in the money market fund should exceed that of $1,000 of his $10,000 invested in BDCL and $9,000 in the money market fund, since his effective borrowing rate on the extra $1,000 invested in BDCS is less than what the imputed borrowing cost that BDCL uses. As I indicated in the article ” BDCL: The Third Leg Of The High-Yielding Leveraged ETN Stool, ” the 44 Business Development Companies that comprise the index upon which BDCL is based are a varied lot. Medallion Financial finances taxi cab companies. ACAS manages $20 billion worth of assets, including American Capital Agency Corp. (NASDAQ: AGNC ) and American Capital Mortgage Investment (NASDAQ: MTGE ), which are mREITs that are included in MORL. Each of the 44 Business Development Companies that comprise the index upon which BDCL is based have their own specific risk factors. The power of diversification can make a portfolio now comprised mainly of high-yielding interest rate-sensitive instruments more efficient when BDCL is added to that portfolio. As I explained in the article ” 30% Yielding MORL, MORT And The mREITs: A Real World Application And Test Of Modern Portfolio Theory ,” a security or a portfolio of securities is more efficient than another asset if it has a higher expected return than the other asset but no more risk, or has the same expected return but less risk. Portfolios of assets will generally be more efficient than individual assets. Compare investing all of your money in one security that had an expected return of 10% with some level of risk to a portfolio comprised of 20 securities each with an expected return of 10% with the same level of risk as the single security. The portfolio would provide the exact same expected return of 10%, but with less risk than the individual security. Thus, the portfolio is more efficient than any of the individual assets in the portfolio. My projection of $0.8216 for the BDCL January 2016 dividend would be an annual rate of $3.29 This would be a 19.9% simple yield, with BDCL priced at $16.5 and an annualized quarterly compounded yield of 21.5%. If someone thought that over the next five years market and credit conditions would remain relatively stable, and thus, BDCL would continue to yield 21.5% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $264,290 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $20,800 first-year annual rate to $56,822 annually. BDCL prices and dividends as of December 23, 2015 name ticker weight(%) price ex-date dividend freq contribution American Capital Ltd ACAS 11.51 14.19 Ares Capital Corp ARCC 9.97 14.63 12/11/2015 0.38 q 0.0857 Prospect Capital Corp PSEC 9.2 7.22 1/27/2016 0.08333 m 0.1055 Fs Investment Corp FSIC 8.61 9.21 12/18/2015 0.22275 q 0.0690 Main Street Capital Corp MAIN 5.5 30.2 2/18/2016 0.18 m 0.0491 Apollo Investment Corp AINV 4.86 5.41 12/17/2015 0.2 q 0.0595 Fifth Street Finance Corp FSC 3.58 6.29 2/10/2016 0.06 m 0.0339 Golub Capital BDC Inc GBDC 3.29 16.88 12/9/2015 0.32 q 0.0207 TPG Specialty Lending Inc TSLX 3.25 16.86 12/29/2015 0.39 q 0.0249 Hercules Technology Growth Capital Inc HTGC 3.24 12.38 11/12/2015 0.31 q 0.0269 BlackRock Kelso Capital Corp BKCC 2.67 9.53 12/22/2015 0.21 q 0.0195 TCP Capital Corp TCPC 2.66 14.34 12/15/2015 0.36 q 0.0221 Solar Capital Ltd SLRC 2.64 16.82 12/15/2015 0.4 q 0.0208 New Mountain Finance Corp NMFC 2.57 12.9 12/14/2015 0.34 q 0.0224 Goldman Sachs Bdc Closed End Fund GSBD 2.42 19.85 12/29/2015 0.45 q 0.0182 Triangle Capital Corp TCAP 2.35 19.52 12/7/2015 0.59 q 0.0235 Capital Southwest Corp CSWC 2.3 14.29 5/12/2015 s 0.0000 PennantPark Investment Corp PNNT 1.81 6.45 12/22/2015 0.28 q 0.0260 Medley Capital Corp MCC 1.73 7.84 11/23/2015 0.3 q 0.0219 THL Credit Inc TCRD 1.37 11.2 12/11/2015 0.34 q 0.0138 TICC Capital Corp TICC 1.36 6.1 12/14/2015 0.29 q 0.0214 PennantPark Floating Rate Capital Ltd PFLT 1.15 11.44 12/22/2015 0.095 m 0.0095 Fidus Investment Corp FDUS 0.89 14.38 12/2/2015 0.43 q 0.0088 Gladstone Investment Corp GAIN 0.89 7.9 12/16/2015 0.0625 m 0.0070 Fifth Street Senior Floating Rate Corp FSFR 0.87 8.52 2/3/2016 0.075 m 0.0076 Triplepoint Venture Growth BDC Corp TPVG 0.8 12.12 11/25/2015 0.36 q 0.0079 Garrison Capital Inc. GARS 0.78 12.66 12/9/2015 0.35 q 0.0071 Capitala Finance Corp CPTA 0.69 12.21 12/22/2015 0.2067 m 0.0116 Monroe Capital Corp MRCC 0.61 12.94 12/11/2015 0.35 q 0.0055 Newtek Business Services Corp NEWT 0.61 13.52 11/16/2015 3.19 q 0.0477 MVC Capital Inc MVC 0.58 7.58 12/29/2015 0.305 q 0.0077 Gladstone Capital Corp GLAD 0.55 7.3 12/16/2015 0.07 m 0.0052 KCAP Financial Inc KCAP 0.52 4.27 10/9/2015 0.21 q 0.0085 Solar Senior Capital Ltd SUNS 0.51 15.01 12/15/2015 0.1175 m 0.0040 Medallion Financial Corp TAXI 0.49 7.1 11/10/2015 0.25 q 0.0057 Horizon Technology Finance Corp HRZN 0.48 11.72 12/16/2015 0.115 m 0.0047 Stellus Capital Investment Corp SCM 0.47 10.14 12/29/2015 0.1133 m 0.0052 Alcentra Capital Corp ABDC 0.41 12.17 12/29/2015 0.34 q 0.0038 American Capital Senior Floating Closed Fund ACSF 0.4 9.96 1/20/2016 0.097 m 0.0039 CM Finance Inc CMFN 0.3 10.55 12/16/2015 0.3469 q 0.0033 WhiteHorse Finance Inc WHF 0.29 11.48 12/17/2015 0.355 q 0.0030 Oha Investment Corp OHAI 0.28 3.99 12/29/2015 0.12 q 0.0028 OFS Capital Corp OFS 0.28 10.87 12/15/2015 0.34 q 0.0029 Harris & Harris Group Inc TINY 0.27 2.21 0 0.0000