Dear Investor,
The market volatility that has started 2022 is making many investors nervous about their portfolios.
But not me: I have been pleased with how well the high-yield investments recommended in my Dividend Hunter service have performed.
One high-yield category in particular has really stood out, with great dividends and share price appreciation through the first six weeks of the new year…
The Dividend Hunter strategy focuses on building a stable and growing high-yield income stream. As a portfolio, my recommendations have done much better this year compared to the broad market indexes.
Whether I earn a nice dividend or see share prices going up, even as the popular stocks go down, it feels like I am making money every day.
Business Development Companies (BDCs) are one high-yield sector providing outstanding performance to start the year. The VanEck Vectors BDC Income ETF (BIZD) is up 3.6% year to date. The fund also yields just over 10%. For comparison, the SPDR S&P 500 Trust ETF (SPY) has declined by 3.7% year-to-date.
BDCs operate under special legislation that stipulates they provide debt and equity capital to small-to-medium-sized corporations. Most BDCs operate primarily as lenders, and their primary assets are portfolios of corporate loans. BDCs are required to pay out at least 90% of net income as dividends to investors.
Typically, a BDC makes loans with adjustable interest rates. This feature means as rates go up, a well-managed BDC should see improving profits. If you are hunting for investments that benefit from higher rates, BDCs should be on your radar.
For example, the largest BDC by market cap is Ares Capital (ARCC). Shares of this $10 billion market-value company yield 7.5% and have appreciated by 5.3% this year so far. Last week, Ares boosted its dividend rate by 2%. As the largest BDC, Ares Capital will have the highest weighting in BDC-focused ETFs like BIZD.
About 50 BDCs trade on the stock exchanges. They range from micro-cap companies up to Ares Capital’s $10 billion valuation. While smaller BDCs will sport higher, double-digit yields, you will likely realize better total returns from the larger companies in the sector. Larger size provides efficiencies, portfolio diversification, and lower expenses, which would otherwise eat into net investment income.
It would be best to avoid any BDC trading at a steep discount to their net asset value (NAV), which can be viewed as similar to book value. Discounted share pricing is both a danger signal and a deal signal. I like BDCs trading at a premium to NAV. These companies can raise equity capital that is automatically accretive to the NAV.The Dividend Hunter recommendations list currently includes three high-quality BDCs. I regularly review most of the sector to keep the best of the bunch on the list. To see how to get access, click here.
