By Ahmed Ishtiaq
Business Development Companies became extremely popular among the income and yield hunting investors during the last decade. Many BDCs made massive dividend payments and had dividend yields over 10%. By definition, BDCs have to distribute 90% of their taxable income to their shareholders. Further, BDCs get favorable tax treatment and can avoid federal excise tax if they distribute 98% of the taxable income. Consequently, most of the BDCs distribute almost 98% of their taxable income. As a result, these companies have massive dividends and mouth watering dividend yields. BDCs mainly focus on investing in private companies rather than public companies, and provide significant managerial assistance.
In this article, we have tried to identify three stocks with high dividend yields. We take a look at the business models, investments and dividend yields of these companies.
Main Street Capital Corporation:
Main Street Capital Corporation (NYSE:MAIN) primarily makes equity, equity related and debt investments in small and medium sized companies. The company's investments are usually made for management buyouts (MBOs), growth financings, recapitalizations, acquisitions and financings of companies. A list of portfolio companies can be seen here. The company has beaten analyst expectations in each of previous four quarters. Recently, Main Street reported third quarter distributable investment income of $0.51 per share, showing a year-over-year increase of 11%. Total distributable investment income for the company increased by 48% from the same quarter last year.
Main Street declared dividends of $0.45 per share for the fourth quarter of 2012. In addition to the regular monthly dividend of $0.15 per share, the company will offer $0.35 per share in January 2013. At the moment, the stock is trading at a P/E ratio of 7.75 and has a dividend yield of 6.51%. On a price-to-book basis, the shares are trading at 1.58, a 43.6% premium to the peer group average of 1.1. Given the company's strong fundamentals, the valuation looks justified.
Prospect Capital Corporation:
Prospect Capital (NASDAQ:PSEC) mainly provides venture, mature, mezzanine finance, buyouts, recapitalizations and cash flow term loans to private companies. Prospect has impressive earnings growth and a solid balance sheet. List of companies in the portfolio can be found here. At the moment, the company has a yield of 12% and an annual dividend of $1.22 per share. Prospect has a forward P/E ratio of 8.33. Furthermore, the stock trades at a discount to its book value and has a P/B ratio of 0.94. Like Main Street, PSEC has beaten analyst expectations during the past four quarters.
At the moment, the company has net assets of $1.88 billion on its books. Furthermore, total liabilities of the company are about 35% of total assets. At the end of the quarter, PSEC generated net investment income of over $74 million, compared to $27.8 million for the same quarter last year. The company's equity-to-assets ratio is 0.67, versus Apollo coming in at 0.58. A strong balance sheet and impressive growth in investment income suggest that the company can provide sustainable dividend yield.
TICC Capital Corporation:
TICC Capital Corp. (NASDAQ:TICC) is primarily engaged in providing capital to a wide-range of U.S.-based technology companies. TICC invests in companies with annual revenues of less than $200 million or a market capitalization of less than $300 million. The company provides funds up to $30 million with a maximum maturity of seven years. The company offers a juicy dividend yield of 12.67% and an annual dividend of $1.16. For the most recent quarter, the company maintained its cash distribution of $0.29 per share. Total investment income for the third quarter of 2012 was $15.6 million, down 23.8% from the previous quarter.
The investment income in the second quarter had a non-recurring item of $3.4 million, which overstated the earnings. However, special items were not the only reason for a decline in total net investment income - the company also generated lower interest income. Core investment income for the third quarter stood at $9.3 million, or $0.24 per share. The company deployed about $128 million in additional investments in the third quarter. For the same period, it received proceeds of about $54.3 million from repayments, sales and amortization payments on its debt investments.
At the end of the quarter, net asset value per share was $9.85 compared with $9.47 per share in June. At the moment, the stock has a P/E ratio of 12.89 and a forward P/E ratio of 7.50. Moreover, the stock is trading at a discount based on a P/B ratio of 0.93.
Due to the regulatory demands, BDCs provide a great opportunity for dividend collecting investors. All of the companies mentioned here have strong balance sheets and impressive earnings growth. In addition, these companies have some of the highest dividend yields in the market. If the U.S. economy does not go into recession, these companies will continue to deliver impressive earnings. If the economy recovers, small and medium companies will need more capital. As a result, healthy growth in earnings for these companies will continue.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.