History tells us that
recent outperformers are your best bets for future gains. If you like high
dividends, Business Development Corporations (BDCs) are worth a look.
Combining those two thoughts, here are six strong BDC candidates.
over a year-ago, in February 2012, I told
you about a relatively unknown type of dividend paying stock called
Business Development Companies (BDCs).
column, I described a portfolio of five BDCs paying expected dividend
yields ranging from 6.9% to 11.6%.
who bought those five BDCs the day after that column was published and
sold one-year later would have averaged a 19% return (dividends plus
share price appreciation) compared to 13% for the S&P 500.
those numbers, it’s worth taking another look at BDCs. First some
background and then I’ll give you today’s list.
Congress created the Business Development Company category a
number of years ago to encourage the flow of capital to firms that are
too large to borrow from banks, but too small to list on the stock
market. These are typically firms with annual revenues from $10
million to $300 million. BDCs make mostly short-term, unsecured loans
in the $2 million to $50 million range to such firms. Also, BDCs often
take ownership positions (equity interest) in their client companies.
what makes BDCs so interesting to us. Congress decreed that BDCs would
not be required to pay federal corporate income taxes if they paid out
at least 90% of taxable income as dividends to shareholders.
qualify for that tax break, BDCs must also invest at least 70% of
assets in private or thinly traded public corporations and offer
managerial assistance to their client companies.
downside, because they don’t pay corporate taxes, dividends paid by
BDCs are not subject to the 15/20% maximum tax rate. Instead, BDC
dividends are taxed at ordinary rates. Thus, it’s best to hold them in
Fair Weather Stocks
Because they invest in relatively small companies that might
not survive severe economic downturns, you should consider BDCs to be
“fair weather” stocks. That is, only invest in BDCs when the U.S.
economic outlook looks strong. I believe that is the case now, but
don’t even think about buying BDCs if you don’t agree.
pay quarterly dividends, but because many income investors prefer to
receive monthly payouts, last year’s portfolio included only monthly
dividend payers. This year, I’m taking a different tack.
Buy High & Sell Higher
Although we’re told to “buy low and sell high,” considerable
research has found that the best returns come from stocks that have
already outperformed the market. In other words, “buy high and sell
higher.” This is the basis of the “momentum” strategies followed by
many hedge funds.
Of the 22 BDCs that I track, here are the top six in terms of
the last 12-months’ price action, with the most weight given to recent
moves. Unless otherwise noted, all pay dividends quarterly.
Triangle Capital (TCAP)
Makes loans in the $5 million to $25 million range to companies with
revenues of $20 million to $200 million. Pays dividends equating to a
7.1% expected yield (next 12-months dividends divided by current share
Makes loans in the $1 million to $10 million range to companies with
revenues of $10 million to $100 million. Also manages funds that
invest in syndicated loans, high yield bonds and other credit
instruments. Pays an 11.0% expected dividend yield.
Hercules Technology Growth Capital
Provides senior secured loans from $5 million to $50 million to
venture capital-backed technology firms, in all stages of development,
including start-ups. Pays 7.9% expected yield.
Pennant Park Floating Rate Capital
Makes mostly “floating rate” senior secured loans in the $1 million to
$10 million range to companies with revenues from $30 million to $300
million. Pays monthly dividends, 7.2% yield.
Fidus Investment (FDUS)
Provides loans in the $4 million to $12 million range to companies
with revenues in the $10 million to $150 million range. Pay an 8.3%
Medley Capital (MCC)
Offers loans from $10 million to $50 million to companies with
revenues form $30 million to $300 million. Pays a 9.4% yield.
The estimated dividend yields listed
assume that each BDC will continue paying the same amount as its last
declared dividend for the next 12-months. If the economy continues to
strengthen, you can expect dividend hikes. Conversely, expect dividend
cuts and lower share prices if the economy sours.
listed are my picks. As always, you should do your own due diligence.
The more you know about your stocks, the better your results.
For more on BDCs, check out
Business Development Corporations section of my Dividend Detective