Yield (dividend / price) results from Yahoo Finance as of market closing prices on July 18 for Business Development Company Stocks listed here were compared with analyst 1-yr target projections to reveal four actionable conclusions discussed below. Since June when the Russell Index threw representatives of these 40 BDC dogs off their grid and to the wolves, so to speak, it became appropriate to track BDC puppy progress as a pack.
Wall Street Wizard Weights
One-year mean target price 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 July BDC Dividend Dogs Spawned 7.8% to 17.3% Upsides
Forty For the Money
Since the late 2011 a series of Arnold reports has reported results of dog dividend methodology used 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 July 18 represented companies looking to invest growth capital of $3m to $350m in 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, fourth, seventh, ninth, and tenth were so inclined: Prospect Capital (NASDAQ:PSEC); TICC Capital (NASDAQ:TICC) ; Fifth Street Finance (NYSE:FSC) ; Monroe Capital (NASDAQ:MRCC) ; THL Credit (NASDAQ:TCRD) .
The other half revealed their investment targets and placed first, third, fifth sixth and eighth: KCAP Capital (NASDAQ:KCAP)  was another CLO investor; Medley Capital (NYSE:MCC) $10/50m ; OFS Capital (NASDAQ:OFS) $5/50m ; Full Circle Capital (FULL) $3/10m . These complete the top ten BDC dog list by yield.
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 7/18/2014 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 was bearish after the first of the year. However, since June they turned bullish as aggregate single share price gained 8.7% and aggregate dividend from $10k invested as $1k in each of the top ten BDC dogs declined at a rate of 3.3%.
Dow dogs frolicked as projected annual dividend from $10k invested as $1K in each of the top ten fell 1.5% since June. At the same time aggregate single share price rose 4% to confirm the bullish trend. 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 $132 or 35% in January/February, expanded to $180 or 49% for March/April, widened to $193 or 53% for May/June, then gapped to $221 or 61.5% in July. Much of the recent move was attributable to price gains by several of the top ten, most notably by PFE, & CSCO; but especially MSFT which exited the top ten list by yield and was replaced by KO.
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 Willed A 15.1% Net Gain from Top 20 BDC Dogs Come July 2015
Top twenty dogs from the Business Development Company industry were graphed below to show relative strengths by dividend and price as of July 18, 2014 and those projected by analyst mean price target estimates to the same date in 2015.
A hypothetical $1000 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 6.4% 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 7.3% 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 Allege Ten Top BDC DiviDog Net Gains of 15.2% to 27.6% by July 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 Thomson/First Call in Yahoo Finance for 2015:
KCAP Financial, Inc netted $276.30 based on estimates from three 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 $252.73 based on dividends plus mean target price estimate from twelve analysts less broker fees. The Beta number showed this estimate subject to volatility 60% less than the market as a whole.
Capitala Finance Corp. (NASDAQ:CPTA) netted $234.63 based on dividends plus the mean of annual price estimates from seven analysts less broker fees. A Beta number was not available for CPTA.
OFS Capital netted $222.95 based on dividend plus a mean target price estimate from two analysts less broker fees. A Beta number was not available for OFS.
Oxford Lane Capital Corp. netted $204.07 based on dividends plus the mean of annual price estimates from two analysts less broker fees. A Beta number was not available for OXLC.
TICC Capital Corp. netted $188.25 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.
Prospect Capital Corporation netted $184.31 based on dividends plus a mean target price estimate from nine analysts less broker fees. The Beta number showed this estimate subject to volatility 17% less than the market as a whole.
THL Credit, Inc. netted $173.24 based on estimates from eight analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 42% less than the market as a whole.
Garrison Capital (NASDAQ:GARS) netted $154.38 based on dividends plus mean target price estimate from four analysts less broker fees. A Beta number was not available for GAR.
Stellus Capital Investment (NYSE:SCM) netted $152.18 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.
Average net gain in dividend and price was 20.4% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 50% 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, INTC, GE, 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.