BDC’s, or Business Development Companies, provide a wide range of financial services, often to lower and middle market companies. Many of them charge fixed interest rates for services including debt and equity investments, or buyout transactions. It’s reasonable to think of these companies as similar to private equity firms.
While these businesses might not be familiar to all investors, they have qualities that should be appealing to nearly everybody. Specifically, many Business Development Companies trade for attractive multiples of their earnings and pay huge dividends to shareholders.
Three solid candidates
Investors looking for yield in the current market environment would be wise to consider such BDC’s as Prospect Capital Corporation (NASDAQ:PSEC) and Main Street Capital (NYSE:MAIN).
Prospect Capital Corporation (NASDAQ:PSEC) raised its dividend at the end of 2012 by 8% and its current annualized distribution of $1.32 per share amounts to a more than 12% yield at recent prices. Main Street Capital Corporation (NYSE:MAIN) recently raised its monthly payout by 3%. The company’s $1.86 per share dividend yields 7% at recent prices.
A third interesting company is Apollo Investment Corp. (NASDAQ:AINV)
Apollo offers a handsome yield of nearly 11% at recent prices, but it’s worth noting the company has cut its payout twice since 2008.
Attractive valuations aplenty
Apollo Investment Corp. (NASDAQ:AINV) recently issued its fourth-quarter and full-year financial report, and the results were mixed.
Net investment income per share was flat during the quarter and down 6% for the year ended March 31. The company invested $1.5 billion during the year, and CEO James Zelter points investors to the company’s strong underwriting standards and prudent investment philosophy to deliver attractive returns going forward.
Notably, Apollo Investment Corp. (NASDAQ:AINV) is a closed-end investment company, and at the end of the most recent fiscal quarter held a net asset value of $8.27 per share, up from $8.14 per share at the end of 2012.
That means that at current prices, Apollo is trading at a 9% discount to its NAV. Combined with its hefty dividend yield, Apollo Investment Corp. (NASDAQ:AINV) has the potential to offer investors the unbeatable combination of dividend income and considerable share price gains going forward.
On valuation, Prospect Capital Corporation (NASDAQ:PSEC) trades for 10 times trailing earnings and Main Street trades for only 8 times trailing EPS.
Main Street reported full-year investment income rose 37%. Prospect is also seeing similar success with its own investment projects. Prospect Capital Corporation (NASDAQ:PSEC)’s total investment income more than doubled in its fiscal second quarter year over year.
When you consider the S&P 500 Index yields just over 2% and the 10-Year Treasury, even after its impressive drop in recent weeks, still yields just 2.59%, huge dividend yields such as these look even more attractive.
In the end, these stocks are not for the faint of heart. After all, financial companies employ leverage to enhance their returns, which as we all learned the hard way during the financial crisis, is a double-edged sword.
Under adverse market conditions, you should fully expect these stocks to exhibit volatility in both their underlying performance as well as their dividend payments.
If you’re not afraid to take some risk and want exposure to the financial sector, these companies are worthy of further research.
Robert Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Look to Business Development Companies For Yield and Growth originally appeared on Fool.com and is written by Robert Ciura. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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