Business Development Companies (BDCs)
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.”
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
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.
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
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
Hercules Technology Growth Capital
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%.
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%.
Makes mostly subordinated loans in the $5 million to $35 million range
to companies with revenues of $20 million to $250 million. Expected
listed are my picks. As always, you should do your own due diligence.
The more you know about your stocks, the better your results.
I hold positions in Triangle Capital, Hercules Technology and Main