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Business Development Companies (BDCs)

The old adage, “buy low, sell high,” still holds true. But, thanks to the hot market, it’s tough to find stocks that aren’t already “fully valued.”

However, one category of stocks, Business Development Companies (BDCs), fits that bill. For a variety of reasons, none long-term, BDCs underperformed the overall market over the past year or so. For instance, a portfolio of six BDCs that I described in January 2013 only averaged a 17% total return (price appreciation plus dividends) through June 2014 compared to 33% for the S&P 500.

Why BDCs Pay High Dividends
Business Development Companies are corporations that loan money to, and sometimes take ownership positions in companies, typically with $10 million to $150 million in annual revenues. These are firms too large to borrow from their local bank, but too small to go public. Assuming that they meet certain requirements, BDCs don’t pay federal income taxes as long as they pay 90% of taxable income to shareholders as dividends. As a result, they pay high dividend yields (next 12-months dividends divided by current share price), typically in the 7%  to 11% range.  

Because they don’t pay corporate taxes, BDC dividends are taxed at ordinary rates, they don’t qualify for the 15/20% maximum rate. So, it’s best to hold them in tax-sheltered accounts.

Pick Strongest Players
Research has found that in any given category, your best bets are the stocks with the strongest recent stock price action. With that in mind, of the 23 BDCs that I track on my Dividend Detective site (www.dividenddetective.com), here are the top five in terms of the last 12-months’ price action, with the most weight given to recent moves. Unless otherwise noted, all pay dividends quarterly.

Full Circle Capital (FULL)
Makes mostly senior secured loans from $3 million to $10 million. Pays monthly dividends equating to an 11.7% expected yield.

Apollo Investment (AINV)
One of the largest BDCs, Apollo holds a mixture of senior and subordinated (not senior), secured and unsecured loans, from $20 million to $250 million, to companies with annual revenues in the $50 million to $2 billion range. Pays 9.6% expected dividend yield.

Hercules Technology Growth Capital (HTGC)
A way to invest in Silicon Valley startups, Hercules makes senior secured loans from $5 million to $50 million to venture capital-backed technology firms, in all stages of development, including start-ups. Expected yield 8.0%.

Main Street Capital (MAIN)
Makes secured loans in the $5 million to $20 million range to firms with annual revenues from $10 million to $150 million. Pay regular monthly dividends plus special payouts in January and June. Expected yield (including specials) 7.9%.

Triangle Capital (TCAP)
Makes mostly subordinated loans in the $5 million to $35 million range to companies with revenues of $20 million to $250 million. Expected yield 8.0%.

The BDCs listed are my picks. As always, you should do your own due diligence. The more you know about your stocks, the better your results.

Disclosure: I hold positions in Triangle Capital, Hercules Technology and Main Street.

published 6/30/14 

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