Summary

• Comparing the ETF, DVY and the 2X ETN, DVYL.
• Making the short list — the Dow Jones U.S. Select Dividend Index.
• Is that an elephant in the room? Risks of an ETN.
• And a Gorilla, too! Leveraging and its effects.

During my research for high yielding investments and the development of the Average Joe Highest Yield portfolio (Part 1 here). I became intrigued with the UBS ETRACS Monthly Pay 2X Leveraged Dow Jones Select Dividend Index ETN (NYSEARCA:DVYL ). Yes, that’s quite a title and thankfully, I’ll refer to it by its ticker symbol DVYL from here on. One of the sources I used to check on DVYL was this website. Strangely, there were no focus articles found for this ticker symbol. So here’s to breaking new ground. Let’s dig deeper.

This is one of about thirty UBS ETRACS ETN products. As found in the product’s website (here ), this product is senior, unsecured, unsubordinated debt securities that are designed to track the total return of a specific market index, in this case the Dow Jones U.S. Select Dividend Index (DJDVP). This is an index of 100 stocks that meet specific criteria developed by Dow Jones (more about that below)

Many of us are familiar with a similar ticker, the iShares (BlackRock) Select Dividend ETF (NYSEARCA:DVY ). This ETF is also tied to the same Dow Jones U.S. Select Dividend Index. Even though DVY and DVYL are distinct investment vehicles, would this give us an opportunity to compare the results of investing on these two securities?

We have a limited timeframe in which to compare the two. DVY has been around for almost 11 years. DVYL has been trading for just under two and a half years. So when comparing the performance of these securities, we’ll go back to July of 2012.

Ah, yes, the summer of 2012. The Dow was sitting at 12871.39. The S&P, just 1365.51. Facebook (NASDAQ:FB ) was just 6 weeks old at $30.77 and Apple (NASDAQ:AAPL ), at a pre-split $592.52, had yet to pay its first dividend of the millennium. Our two stars, DVY and DVYL, were at $56.46 and $28.93 respectively. First, let’s delve into the underlying index.

The Index

How does a company make it into the Dow Jones U.S. Select Dividend Index? The folks at Dow Jones, as you would expect, have done their homework to whittle the universe of dividend paying stocks down to the top 100 that meet these market criteria (Source: Author’s re-write from Dow Jones Dividend Indices Methodologies ).

• The list excludes REITs.
• A company must have non-negative dividend growth rate over the last 5 years.
• A company must have a 5-year average dividend coverage exceeding 167%.
• The selection must have paid dividends in each of the last 5 years.
• The company must have a non-negative trailing twelve-month ( ( TTM)) earnings per share.
• The stock must have an average daily trading volume of at least 200,000 shares over the last three months.
• The list is rebalanced every year (If a stock is already on the list and does not meet all of the criteria listed above, as long as average daily volume is 100,000 shares over the last 3 months and makes it into the top 200, it may be included in the universe list. In case of corporate issues or instability in the dividend is determined by the Index committee, an adjustment/elimination of a stock could be made quarterly.
• The top 100 by yield (excluding special dividends) make the cut.

The end result is a select list that has sound fundamentals and a low Beta (3 yr. avg is .80, 5 yr. avg. is .92). The list is impressive, with big names such as Lockheed Martin (NYSE:LMT ), McDonald’s (NYSE:MCD ), Philip Morris International (NYSE:PM ), Intel (NASDAQ:INTC ), Merck (NYSE:MRK ) and Pfizer (NYSE:PFE ) to name a few. The list is 1/3 utilities as you would expect a long paying dividend list would be. So how does DJDVP compare to the big averages?