How do you calculate a dividend yield

how do you calculate a dividend yield

CEFL March Dividend Brings Yield To 19.2% - SMHD May Be A Good Diversifier For CEFL

Feb. 26, 2015 4:27 PM • cefl

  • CEFL continues to generate high yields for those willing to accept the risk that leverage entails.
  • A new UBS leveraged ETN, SMHD, which just started trading, may be a good diversifier for CEFL.
  • There are some concerns with SMHD, but the 17.7% yield makes it worth looking at further.

The UBS ETRACS Monthly Pay 2xLeveraged Closed-End Fund ETN (NYSEARCA:CEFL ) underwent a rebalancing at the end of 2014. The second monthly dividend, based on the new composition of the index upon which CEFL is based, will be paid in March 2015. The dividend will be computed from those components that had ex-dividend dates in February 2015.

Of the 30 index components, 29 now pay monthly. Only the Morgan Stanley Emerging Markets Domestic Debt Fund (NYSE:EDD ) now pays quarterly dividends in January, April, October, and July. Thus, it will not be included in the March 2015 CEFL monthly dividend calculation. The usual method of estimating an annualized yield for an ETN that has some components that pay monthly and others that pay quarterly is not appropriate for CEFL at this point.

Normally, one would annualize the three trailing months of dividends from such an ETN to calculate an annualized yield. This procedure is based on the fact that over a three-month period all of the components would have paid their dividends. However, the December 2014 CEFL dividend is based on an index that is significantly different in terms of the closed-end funds which comprise the index, as compared to those of the closed-end funds which comprise the index upon which the February and March 2015 dividends are based.

My calculation using the 29 components expected to have ex-dividend dates in February 2015 projects a March 2015 dividend of $0.3214. None of the closed-end funds in the index changed their dividends from prior levels. The increase in the March CEFL monthly dividend as compared to the February dividend is due to a number of factors.

The value of each CEFL share has increased about 5% from January 30, 2015, to February 25, 2015. As I explained in MORL Dividend Drops Again In October, Now Yielding 21.5% On A Monthly Compounded Basis. if the dividends on all of the underlying components in a leveraged ETN, such as CEFL, were to remain the same for a specific month, but the net asset value was 5% higher, the dividend paid, which is essentially a pass-through with no discretion by management, would also increase by 5%. This is the result of the rebalancing of the portfolio each month required to bring the amount of leverage back to 2X.

Additionally, three of the monthly-paying CEFL components did not have ex-dates in January 2015, but do have ex-dates in February 2015. These are the Prudential Global Short Duration High Yield Fund, Inc. (NYSE:GHY ), the Voya Global Equity Dividend and Premium Opportunity Fund (NYSE:IGD ) and the Prudential Short Duration High Yield Fund (NYSE:ISD ). Thus, they were not included in the February 2015 CEFL monthly dividend calculation even though they had pay dates in February 2015. However, they are included in the calculation of the dividend that will be paid in March 2015. There were also some changes in the composition of the index in terms of the weights of individual components.

My previous procedure was to take my monthly prediction of the next dividend to be paid by a leveraged ETN, such as CEFL, and then add the two prior months to get a projected quarterly figure. This would smooth out any "small month" - "big month" effects due to some components paying monthly and some quarterly. Then, I would annualize that figure to get a yield on an annualized compounded basis.

That procedure may not now be appropriate for CEFL at this point in time. The composition of the index has changed significantly. Also, adding up the March 2015, February 2015, and the January 2015 months would bias the yield upward since it would include the year-end special dividends paid by some of the closed-end funds and would reflect the old composition of the index that was used to compute the January 2015 dividend. See CEFL January Dividend Gives Yield Of 23% for a listing of the CEFL components that paid special year-end dividends and a description of how

the contribution to the monthly dividend from each component is calculated.

To get a better measure of the annualized compounded yield, I took all of the components and determined an average monthly dividend for CEFL by including the quarterly-payer EDD. This results in a monthly average dividend rate of $0.3369. This result can also be obtained by adding the projected March dividend of $0.3214 to the contribution that would have been made had EDD been a monthly payer.

The EDD monthly equivalent contribution is calculated by first determining an imputed value of EDD by multiplying the 4.2% weight in the index of EDD by the imputed gross value of the portfolio. Since there are 8.8 million shares outstanding and the indicative value of CEFL as of February 25, 2015, was 22.8048, the imputed gross value of the entire portfolio is $401.364 million, taking into account the 2X leverage. The imputed value of EDD is the 4.2% weight in the index of EDD times the imputed gross value of the entire portfolio of $401.364 million, which is $16.857 million. The imputed share number for EDD is the $16.857 million value divided by the share price of $10.32, which is 1,633,460.

Multiplying the imputed share count of 1,633,460 by the quarterly dividend of $0.25 gives a $408,365 dollar amount that EDD would add to the dividend calculation when it pays a quarterly dividend. Dividing that amount by 3 gives a $136,122 monthly equivalent. Dividing the $136,122 by the 8.8 million shares outstanding results in a monthly equivalent contribution from EDD of $0.0155. Adding that to the projected March dividend of $0.3214 results in a monthly average dividend rate of $0.3369. This actually may be too conservative since it assumes there will be no special additional dividends during the entire year.

Using the average monthly dividend method results in an annual payout of $4.04 for a simple yield of 17.7% and a compounded annualized yield of 19.2% with CEFL at $22.89. If someone thought that over the next five years interest rates and economic conditions would remain relatively stable, and thus, CEFL 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 $240,257 in five years. More interestingly, for those investing for future income, the income from the initial $100,000 would increase from the $19,200 initial annual rate to $46,132 annually.

A new 2X leveraged ETN from UBS, the ETRACS Monthly Pay 2xLeveraged U.S. Small Cap High Dividend ETN (NYSEARCA:SMHD ) started trading on February 3, 2015. It is based on the Solactive US Small Cap High Dividend Index. The initial yield is 17.7%. I am keeping an eye on it. One interesting aspect of SMHD is that it may be an interesting diversifier for CEFL. This is because closed-end funds are excluded from SMHD. Originally, I looked at SMHD as a diversifier for the UBS ETRACS Monthly Pay 2x Leveraged Mortgage REIT ETN (NYSEARCA:MORL ) since SMHD has many equity issues that would do well in an environment of higher levels of economic activity. However, SMHD has a fairly large number of mREITs that are also in MORL. Since SMHD excludes close-end funds, there is no overlap with CEFL.

There are some concerns with SMHD. The tracking fee is a relatively steep 0.85%, as compared to 0.40% for MORL and 0.50% for CEFL. As with any high-yielding instrument, there is usually some reason why it is trading at a level that results in a high yield. Thus, many of the components of SMHD are energy companies that are depressed due to the collapse in oil and gas prices. The three largest components of SMHD are: Energy XXI (NASDAQ:EXXI ), Denbury Resources (NYSE:DNR ), and Peabody Energy (NYSE:BTU ). The components of the Solactive US Small Cap High Dividend Index upon which SMHD is based are selected based in part of the security's "Forward Looking Distribution Yield," which is more useful than historical data, but in some cases involves educated guesses as to what the future dividends will be. I will be looking further into SMHD.

The table below shows the price as of January 16, 2015, ex-date, pay date, dividend, imputed value, and the imputed number of shares for all of the 30 CEFL components and the dividend amount for the 29 components with ex-dates in February. The latest declared ex-date is shown.

CEFL components as of February 25, 2015


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