Investors who want high yields have recently been well rewarded by investing in "business development companies" or "BDCs". Companies in this sector are set up to generate very high payouts for shareholders. This is possible because BDCs invest in other companies and make debt or equity investments. The gains made from these holdings are returned to shareholders in the form of a quarterly and sometimes even monthly dividend.
The BDC sector has done well in recent months as investors seek the high yields that these stocks provide. Some BDCs have taken advantage of the rally by announcing secondary offerings, which then provide additional funds for future investments. Secondary offerings and other factors can push a stock lower and this is part of the risk of owning an individual stock. Investors who want the high yields that BDCs offer plus the diversification of owning several stocks in this sector might want to consider the exchange traded note or "ETN" which is discussed more in depth below:
UBS E-TRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL) is not without risk, but it provides a very juicy yield of roughly 13%, which rewards investors for investing in the BDC sector. The above average yield is achieved by using leverage or borrowed money to amplify the payout to shareholders. In theory, this investment provides two times the returns of the BDCs it is invested in and that means gains and losses are magnified. That increases risks, so investors may only want to consider a small position. It probably makes sense to wait for a pullback before buying, especially since it is trading near 52-week highs. However, while the leverage can increase the volatility, the very generous dividend yield could smooth out the highs and lows and over time, and provide returns that are hard to beat.
Furthermore, some risk is reduced because of the diversification of its holdings. This ETN holds investments in some very popular BDC stocks which include: Apollo Investment Corp (AINV) which is weighted at about 10.19%, American Capital Ltd (ACAS) weighted at 9.97%, Prospect Capital Corp (PSEC) weighted at 9.97%, Ares Capital Corp (ARCC) weighted at 9.95%, Fifth Street Finance Corp (FSC) weighted at 6.42%, and many others. A complete list of holdings and other details on this investment product can be seen here.
While leveraged investments are generally higher risk, the rewards tend to be higher as well. This ETN could make sense for some investors as a small holding and as part of a well diversified income portfolio.
Here are some key points for BDCL:
Current share price: $29.03
The 52 week range is $17.74 to $29.19
Earnings estimates for 2013: n/a on Yahoo Finance
Earnings estimates for 2014: n/a on Yahoo Finance
Annual dividend: yield is roughly 13%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.