Yield (dividend/price) results from Yahoo Finance as of market closing prices June 13 for Business Development Company Stocks listed here were compared with analyst 1-yr target projections to reveal four actionable conclusions discussed below.
Wall Street Wizard Weights
One-year mean target prices set by brokerage analysts multiplied by the number of shares in a $1k investment were used to compare ten stocks showing the highest upside price potential into 2015 out of 20 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts were optimal for a valid mean target price estimate.
Actionable Conclusion (1) Ten June BDC Dividend Dogs Begat 6.9% to 19.27% Upsides
Forty For the Money
Since the fall of 2011 a series of reports has applied dog dividend methodology to uncover possible buy opportunities in each of eight major market sectors listed by Yahoo Finance. This article responds to recent reader suggestions for a dividend dog analysis of the Business Development Company industry within the financials (Fins) sector.
Dog dividend methodology is based on Michael B. O'Higgins' book "Beating The Dow" (HarperCollins, 1991), which revealed how high yielding stocks whose prices increased (and whose dividend yields therefore decreased) could be sold off once a year to sweep gains and reinvest the seed money into higher yielding stocks in the same index. Now named Dogs of the Dow, O'Higgins' system also works to find bargains in any collection of dividend paying stocks. Utilizing analyst price upside estimates has expanded the stock lists to include popular growth equities, if desired.
Dog Metrics Gauged BDC Stocks by Yield
Top ten business development company dogs showing the biggest dividend yields as of June 13 represented companies looking to invest growth capital of $3 million to $350 million in profitable small to middle market private businesses with revenues over $10 million operating in lucrative niche industries. Top BDC industry stock by yield, Oxford Lane Capital (NASDAQ:OXLC) invests in corporate Collateralized Loan Obligation (CLO) instruments.
Half of the top ten BDC dogs by yield did not disclose their investment target amounts. Companies placing second, third, fourth, eighth and tenth were so inclined: Prospect Capital (NASDAQ:PSEC); KCAP Capital (NASDAQ:KCAP)  is another CLO investor; TICC Capital (NASDAQ:TICC) ; Fifth Street Finance (NASDAQ:FSC) ; THL Credit (NASDAQ:TCRD) . The other half revealed their investment targets and placed fifth through seventh and ninth: Medley Capital (NYSE:MCC) $10/50m ; Full Circle Capital (NASDAQ:FULL) $3/10m ; OFS Capital (NASDAQ:OFS) $5/50m ; NGP Capital Resources Company (NGPC) $10/100m . These complete the top ten BDC dog list.
BDC Yield Leader Dividend vs. Price Results Compared to Dow Index Dogs
Graphs below compared relative strengths of the top ten BDC industry dogs by yield as of market close 6/13/2014 with those of the Dow industrials index. Annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks along with the total single share price of those ten stocks made the data points shown in green for price and blue for dividends.
Actionable Conclusion (2): BDC Pups Were Mauled in May as Dow Dogs Stayed Bullish
The BDC collection of dividend payers has been bearish since the first of the year as total single share price dropped 8.7% and aggregate dividend from $10k invested as $1k in each of the top ten BDC dogs rose at a rate of 4.8%.
Dow dogs frolicked as projected annual dividend from $10k invested as $1K in each of the top ten fell 3.8% since January. At the same time aggregate single share price moved up 9.2% to confirm the bullish annual turn. The Dow dogs' overbought condition in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten increased. The overhang of $111 or 29% in December/January, grew to $132 or 35% in February, expanded to $136 or 36% in March, widened again to $180 or 49% for April, retreated to $167 or 43% in May, then expanded to $193 or 53% for June.
To quantify top dog rankings, analyst mean price target estimates provide a "market sentiment" gauge of upside potential. Added to the simple high yield "dog" metric, analyst mean price target estimates is another tool used to dig out bargains.
Actionable Conclusion (3): Wall Street Wizards Wrestled A 16.5% Net Gain from Top 20 BDC Dogs Come June 2015
The top twenty dogs from the Business Development Company industry were graphed below to show relative strengths by dividend and price as of June 13, 2014 and those projected by analyst mean price target estimates to the same date in 2015.
A hypothetical $1k investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividend amounts to find the dividend return. Thereafter the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2015.
Historic prices and actual dividends paid from $20,000 invested as $1k in each of the highest yielding stocks and the aggregate single share prices of those twenty stocks divided by 2 created data points for 2014. Projections based on estimated dividend amounts from $1000 invested in the twenty highest yielding stocks and aggregate one year analyst target share prices from Yahoo Finance divided by 2 created the 2015 data points: green for price and blue for dividend.
Yahoo projected a 7.5% lower dividend from $10K invested as $1k in ten dogs in this group, while aggregate single share price for those ten was projected to increase by 8.5% in the coming year.
The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts was considered optimal for a valid projection estimate. Estimates provided by one analyst were not applied (n/a).
A beta (risk) ranking for each stock was provided in the far right column of the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stocks movement opposite of market direction.
Actionable Conclusion (4): Analysts Assert Ten Top BDC DiviDog Net Gains of 14.4% to 29.7% by June 2015
Seven of the ten top dividend yielding BDC dogs were verified as being among the ten gainers for the coming year based on analyst 1 year target prices. So this month the dog strategy for the BDC industry as graded by Wall St. wizards was 70% accurate.
Ten probable profit generating trades were revealed by Thompson/First Call in Yahoo Finance for 2015:
KCAP Financial, Inc netted $297.26 based on estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 43% greater than the market as a whole.
Medley Capital Corporation netted $290.51 based on dividends plus mean target price estimate from thirteen analysts less broker fees. The Beta number showed this estimate subject to volatility 60% less than the market as a whole.
Oxford Lane Capital Corp. netted $283.71 based on dividends plus the mean of annual price estimates from two analysts less broker fees. A Beta number was not available for OXLC.
Capitala Finance Corp. (NASDAQ:CPTA) netted $257.99 based on dividends plus the mean of annual price estimates from five analysts less broker fees. A Beta number was not available for CPTA.
Prospect Capital Corporation netted $243.26 based on dividends plus a mean target price estimate from ten analysts less broker fees. The Beta number showed this estimate subject to volatility 17% less than the market as a whole.
TICC Capital Corp. netted $216.29, based on mean target price estimates from four analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 24% less than the market as a whole.
THL Credit, Inc. netted $205.08 based on estimates from twelve analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 44% less than the market as a whole.
Fifth Street Finance netted $193.90 based on dividend plus a mean target price estimate from thirteen analysts less broker fees. The Beta number showed this estimate subject to volatility 32% less than the market as a whole.
Stellus Capital Investment (NYSE:SCM) netted $158.20 based on a mean target price estimate from five analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 97% less than the market as a whole.
New Mountain Finance (NYSE:NMFC) netted $144.11, based on dividends plus mean target price estimate from four analysts less broker fees. The Beta number showed this estimate subject to volatility 88% less than the market as a whole.
Average net gain in dividend and price was 22.9% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 40% less than the market as a whole.
The net gain estimates above did not factor in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
Stocks listed above were suggested only as possible starting points for your index dog dividend stock purchase research process. These were not recommendations.
Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: The author is long FSC, CSCO, GE, CVX, INTC, MCD, MSFT, PFE, T, VZ. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.