Three BDCs Paying 12% to 16%: 1 to Buy, 2 to Sell

Three BDCs Paying 12% to 16%: 1 to Buy, 2 to Sell

Most business development companies (BDCs) have low profiles on Wall Street. Their relative obscurity makes them good vehicles for banking high yields – in fact, today we’ll discuss three that pay between 12% and 16% annually.

BDCs invest in small- and midsize businesses, the building blocks of entrepreneurial America. They were created by the government in the 1980s to help grow up-and-coming companies in a bid to stimulate business and create jobs. They provide debt, equity and other forms of financing to businesses that larger banks and investment firms shy away from.

They’re also income machines by law.

Their regulated structures require them to dole out 90% or more of their taxable income to shareholders in the form of dividends. Their use of debt leverage also helps them juice their profits and payouts (though with borrowed money comes higher risk).

But there are few “free lunches” when it comes to 12%+ yields. So let’s start with two BDC dividend traps.

Prospect Capital (PSEC)
Dividend Yield: 12.3%

Prospect Capital Corporation (PSEC) invests primarily in first- and second-lien secured loans across a wide swath of industries.

Consider some of PSEC’s investments: software firm Blue Coat Systems, water flosser company Waterpik, restaurant supply company TriMark and hospitality payments network operator Onyx CenterSource. Prospect Capital lets you invest in a number of niche companies you simply wouldn’t be able to gain exposure to any other way. And it does so while offering a thick 12%-plus dividend.

But that’s where the fairy tale ends.

Prospect Capital simply has a long history of poor operations. The firm recently reported that fiscal Q3 net investment income declined about 16% year-over-year, sending shares down by double digits in a matter of days. Worse, back in 2015, PSEC cut its monthly dividend to 8.33 cents per share … and hasn’t raised it since.

The headline yield is nice, but everything else should make you think twice.

Prospect Capital (PSEC): That’s It?

Triangle Capital (TCAP)
Dividend Yield: 12.3%

If we’re going to talk about dividend cuts, we also have to talk about Triangle Capital (TCAP), which slashed its dividend from 54 cents to 45 cents around this time last year.

Triangle Capital is similar to PSEC in that it offers expansive industry diversification, investing in consumer products, healthcare, building materials, aerospace, waste management, agricultural and garden products and even nutritional supplements. It typically invests in lower middle market companies through junior capital, both debt and equity.

However, return on equity has plunged in recent years, as have shares, which are off about 40% from their late 2013 peaks. That includes a dip in early May following its most recent earnings report, as the company took a nearly $13 million net realized loss thanks in large part to a write-off of several portfolio companies.

ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL)
Dividend Yield: 16.3%

The ETRACS 2xLeveraged Long Wells Fargo Business Development Company Index ETN (BDCL) is an unorthodox twist on the popular ETF concept.

BDCL is an exchange-traded note (ETN), which in short means that instead of actually holding BDCs, it’s a debt instrument that simply tracks the performance of an index, dividends and all. In this case, BDCL does a little something extra. It not only tracks the Wells Fargo Business Development Company Index – an index of about 40 BDCs – but provides 2-times its daily performance and income.

The chart below compares BDCL to the aforementioned TCAP, as well as BDC blue chips Ares Capital (ARCC) and Main Street Capital (MAIN):

BDCL Has Some Serious Total Return Potential

As you can see, on a price-performance level, BDCL looks like a dog. But its dividends are so formidable that it holds up well on a total-return basis over time. And if you catch BDCL in a bull market for BDCs, you can really bank some big gains and payouts quickly.

Think of BDCL as a trading tool, not an investment. Don’t overstay your welcome as a shareholder if you decide to buy – or the double-downside days will eventually catch up with you in a BDC bear market.

The Retirement Portfolio You NEVER Have to Touch!

Do you really want to trade your nest egg in and out of BDCL in the hopes that you’ve timed the market better than Wall Street pros and algos? Or would you rather collect substantial, secure 8% dividends that can fund a lucrative retirement and allow some sleep at night?

My “No Withdrawal” retirement portfolio is chock-full of “triple threat” stocks that offer enormous headline yield, as well as dividend growth and the potential for 8%-15% capital gains, too!

My ultimate dividend plays deliver everything you need to build a successful retirement portfolio:

  • No-doubt 6%, 7% even 8% yields – and in a couple of cases, double-digit dividends!
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  • Robust dividend growth that will keep up with (and beat) inflation

These are the three most critical elements for any retirement portfolio, because achieving all three allows you to live off income alone while actually growing your nest egg.

Most pundits that talk about so-called “retirement stocks” will point you in the direction of no-growth blue chips that yield 3%, maybe 4% if you’re lucky. But even if you’ve saved up $500,000 for retirement, 4% annually is just $20,000 a year. You and I both know that even with Social Security tucked in there, that’s not a comfortable retirement.

My “No Withdrawal” portfolio averages 8% across the board right now, but also offers dividend growth that will result in double-digit “yields on cost” over time. That will ensure you have every cent of income so you can pay the bills and have plenty left over to enjoy life. Meanwhile, the growth potential of these picks will help grow your nest egg in retirement, which is essential should you ever need to pay for a big one-time expense, whether it’s an emergency or just buying a vacation home.

This all-star portfolio features the absolute best of several high-income assets, from preferred stocks to REITs to closed-end funds and more. That means diversification and continued payouts regardless of how volatile or bearish the stock market becomes.

Don’t let mediocre yields from uninspired, lazy stock picks ruin the retirement you’ve worked so hard to build. You deserve substantial, regular dividend checks that will let you see the world and live in comfort for the rest of your post-career life.

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About Author

Brett

Hi, I’m Brett Owens – and I’m a financial junkie. My “problem” started incollege, when I got a little dose of the stock market – man, was I hooked…in no time, I was reading the Wall Street Journal religously.

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