BDCL Still Attractive With A 19.2% Yield
Summary The projected quarterly $0.9366 dividend for BDCL will be higher than that in the previous quarter. Some of this increase is due to a quirk in the calendar, which caused three of the components of BDCL not to have their dividends included in the prior quarter. The stock is still attractive for those seeking very high yields and willing to accept the risks associated with this sector and the leverage. The ETRACS 2xLeveraged Long Wells Fargo Business Development Company ETN (NYSEARCA: BDCL ) will soon be declaring its dividend for the quarter ending June 30, 2015. The dividend will be paid in July 2015. BDCL is an exchanged traded note that employs 2X leverage to generate exceptionally high yields. 41 of the 44 Business Development Companies that comprise the index portfolio upon which BDCL is based have announced dividends with ex-dates in the second quarter of 2015. American Capital Ltd. (NASDAQ: ACAS ) and Harris & Harris Group Inc. (NASDAQ: TINY ) do not pay dividends. MCG Capital Corp. (NASDAQ: MCGC ) last paid a dividend in August 2014, and is not currently paying one. The calendar helps BDCL’s dividend in the second quarter of 2015 relative to the first quarter. Capital Southwest Corp. (NASDAQ: CSWC ) pays semiannually and did have an ex-date in the second quarter of 2015. KCAP Financial Inc. (NASDAQ: KCAP ) declared a quarterly dividend of $0.21, with an ex-date of April 1, 2015 and a pay date of April 27, 2015. Its latest dividend has an ex-data of July 1, 2015, so that will not be included in the July BDCL dividend calculation, but the April 2015 KCAP dividend will. MVC Capital Inc. (NYSE: MVC ) declared a $0.1350 dividend, with an ex-date of April 23, 2015. Thus, I have included KCAP, MVC and CSWC, which were not in the April 2015 BDCL dividend calculation, in the July 2015 BDCL dividend calculation. From 41 of the 44 Business Development Companies that announced dividends with ex-dates in the second quarter of 2015, I projected that BDCL’s quarterly dividend paid in July 2015 will be $0.9366. This is an increase of 13.3% from the quarterly $0.8265 dividend paid in April 2015. Some of the increase is due to the inclusion of CSWC, KCAP and MVC in the July 2015 BDCL dividend calculation, because of the timing of their ex-dates. There were 2 components of BDCL that reduced their dividends from the prior levels. Fidus Investment Corp. (NASDAQ: FDUS ) declared a regular quarterly dividend of $0.38 and a special dividend of $0.02, both with ex-dates of June 9, 2015. Thus, it paid a total of $0.40. Last quarter, the company declared a regular quarterly dividend of $0.38 and a special dividend of $0.10 for a total of $0.48. Medallion Financial Corp. (NASDAQ: TAXI ) reduced its quarterly dividend to $0.24 from the previous $0.25. Three components of BDCL increased their dividends from the prior levels. Main Street Capital Corp. (NYSE: MAIN ), which pays monthly, declared a special $0.275 dividend, with an ex-date in the second quarter. It did not have a special dividend in the first quarter. TICC Capital Corp. (NASDAQ: TICC ) increased the quarterly dividend to $0.29 from $0.27 in the previous quarter. PennantPark Floating Rate Capital Ltd. (NASDAQ: PFLT ) pays a monthly dividend of $0.095. Prior to March 2015, PFLT paid a monthly dividend of $0.09. It might be noted that CM Finance Inc. (NASDAQ: CMFN ) declared a special dividend of $0.43 on June 10, 2015. However, that special dividend is not included in my July 2015 BDCL dividend calculation, since the ex-date for CFMN’s special dividend of $0.43 is August 28, 2015. The table below shows the weight of each of the components of the index upon which BDCL is based. The prices are as of June 24, 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. Unless specified otherwise, the components pay dividends quarterly. In the frequency column, 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 9.55%, is one the 3 components that do not currently pay any dividends. The other weights of the components that do not currently pay dividends are: TINY has a weight of 0.3%, and MCGC has a weight of 0.63%. Thus, 10.48% 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 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 10.48% 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 10.48% 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. BDCL has existed for about three years, which allows us to run a regression of weekly returns on it versus a proxy for the entire equity market, such as the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). This indicates that BDCL is relatively highly correlated to the equity market, with 72% of the variation in the ETN explained by the variation in SPY. Also, as might be expected with 2X leverage, the beta or coefficient that reflects the degree to which BDCL reacts to changes in the overall market is 1.9. This indicates that if SPY were to change by 1.0%, it would be expected that BDCL would change by 1.9% in the same direction. Even though it is highly correlated with SPY, problems with specific business development companies in the index and that sector in general have caused the ETN to underperform the equity markets in recent months. 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 $0.9366 for the BDCL July 2015 dividend would be an annual rate of $3.7427, based on the trailing four quarters. This would be a 18% simple yield, with BDCL priced at $20.85 and an annualized quarterly compounded yield of 19.2%. If someone thought that over the next five years market and credit conditions would remain relatively stable, and thus, BDCL would continue to yield 19.2% on a compounded basis, the return on a strategy of reinvesting all dividends would be enormous. An investment of $100,000 would be worth $240,602 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $18,100 first-year annual rate to $46,195 annually. BDCL prices and dividends as of June 24, 2015 Company Name Ticker Weight(%) Price Ex-date Dividend Contribution Ares Capital Corp. ARCC 9.95 16.57 6/11/2015 0.38 0.0961401 American Capital Ltd. ACAS 9.55 13.95 0 FS Investment Corp. FSIC 9.41 10.32 6/22/2015 0.2228 0.0855944 Prospect Capital Corp. PSEC 9.38 7.75 8/27/2015 0.0833 0.1274347 Apollo Investment Corp. AINV 6.46 7.29 6/17/2015 0.2 0.0746716 Main Street Capital Corp. MAIN 4.86 32.34 8/18/2015 0.175 0.0506532 Fifth Street Finance Corp. FSC 4.46 6.88 8/12/2015 0.06 0.0491631 TPG Specialty Lending Inc. TSLX 3.23 17.94 6/30/2015 0.39 0.0295846 Golub Capital BDC Inc. GBDC 3 16.87 6/16/2015 0.32 0.023976 Hercules Technology Growth Capital Inc. HTGC 2.98 11.84 5/14/2015 0.31 0.0328735 TCP Capital Corp. TCPC 2.84 15.49 6/12/2015 0.36 0.0278093 New Mountain Finance Corp. NMFC 2.83 14.74 6/12/2015 0.34 0.0275035 PennantPark Investment Corp. PNNT 2.74 9.25 6/11/2015 0.28 0.0349452 Triangle Capital Corp. TCAP 2.55 24.24 6/8/2015 0.59 0.0261505 Solar Capital Ltd. SLRC 2.51 18.47 6/23/2015 0.4 0.0229027 Capital Southwest Corp. CSWC 2.22 50.29 5/14/2015 0.1 0.0018599 BlackRock Kelso Capital Corp. BKCC 2.22 9.31 6/16/2015 0.21 0.0210981 Medley Capital Corp. MCC 2.03 9.34 5/18/2015 0.3 0.027472 TICC Capital Corp. TICC 1.65 6.87 6/12/2015 0.29 0.0293458 THL Credit Inc. TCRD 1.41 12.05 6/11/2015 0.34 0.0167622 Fifth Street Senior Floating Rate Corp. FSFR 0.98 10.01 7/30/2015 0.1 0.0123747 Fidus Investment Corp. FDUS 0.86 16.18 6/9/2015 0.4 0.0089578 KCAP Financial Inc. KCAP 0.77 6.15 7/1/2015 0.21 0.0110778 MVC Capital Inc. MVC 0.76 10.28 4/23/2015 0.135 0.0042051 Medallion Financial Corp. TAXI 0.75 8.72 5/12/2015 0.25 0.0090595 PennantPark Floating Rate Capital Ltd. PFLT 0.73 14.48 6/11/2015 0.095 0.0060537 Garrison Capital Inc. GARS 0.73 15.09 6/10/2015 0.35 0.0071338 Gladstone Investment Corp. GAIN 0.71 7.74 6/17/2015 0.0625 0.0072467 Capitala Finance Corp. CPTA 0.67 16.14 12/18/2015 0.05 0.0026235 Alcentra Capital Corp. ABDC 0.64 13.7 6/26/2015 0.34 0.006692 MCG Capital Corp. MCGC 0.63 4.71 8/18/2014 0 Gladstone Capital Corp. GLAD 0.56 8.1 6/17/2015 0.07 0.0061171 Stellus Capital Investment Corp. SCM 0.56 11.88 6/26/2015 0.1133 0.0067506 Solar Senior Capital Ltd. SUNS 0.53 16.2 6/23/2015 0.1175 0.0048589 Monroe Capital Corp. MRCC 0.52 14.9 6/11/2015 0.35 0.0051464 TriplePoint Venture Growth BDC Corp. TPVG 0.49 13.24 5/27/2015 0.36 0.0056135 American Capital Senior Floating Closed Fund ACSF 0.45 12.73 7/22/2015 0.097 0.0043341 Newtek Business Services Corp. NEWT 0.41 18.25 6/25/2015 0.47 0.0044488 Horizon Technology Finance Corp. HRZN 0.4 12.7 8/17/2015 0.115 0.0045782 OHA Investment Corp. OHAI 0.36 5.75 6/26/2015 0.12 0.0031655 OFS Capital Corp. OFS 0.31 12.39 6/12/2015 0.34 0.0035842 Harris & Harris Group Inc. TINY 0.3 2.77 0 WhiteHorse Finance Inc. WHF 0.3 12.85 6/17/2015 0.355 0.0034919 CM Finance Inc. CMFN 0.29 13.5 9/16/2015 0.3469 0.0031397 Total 0.9365937 Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long BDCL, MORL, CEFL AGNC. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.