One Way To Invest In The Safest BDCs Of August

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Includes: ACSF, AINV, CORR, FSC, GLAD, KCAP, MCC, OFS, PSEC, TICC
by: Fredrik Arnold

Summary

Fourteen of 48 active BDC stocks pay dividends deemed safe because their free cash flow yield exceeds dividend yield. So, the 14 have sufficient margin to pay their promised dividends.

Top 10 safe Business Development Company (BDC) yields from OFS, CORR, GLAD, ACSF, PSEC, FSC, AINV, KCAP, MCC; TICC ranged 10.04% to 20.46% August 5.

Broker targets revealed 10 top yield BDC stocks promising 59.3% more gains from $5k invested in the lowest priced five than from $5K invested in all ten.

What Is A Business Development Company?

Highlights of the definition found in Wikipedia are:

Venture Capital and Private Equity funds are often closed to all but very wealthy investors. Business development companies (BDCs), on the other hand, allow anyone who purchases a share to participate in the open market. A BDC invests in small and mid-sized businesses. This form of company was created by Congress in 1980 by amending the Investment Company Act of 1940. By law, BDCs must meet certain requirements and regulations regarding debt, transactions, ethics, compliance, examination, and reporting. They are taxed as regulated investment companies (NYSEMKT:RIC). As pass-through tax structures, RICs must distribute at least 90 percent of taxable income as dividends to investors. Thus the investor pays the taxes on BDC profits.

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14 Safest BDCs Have Cash Margins to Cover Dividends

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Annual Safety Inspection

A previous article discussed the attributes of the collection of 48 BDC stocks from which these 14 were selected. You see below the list that passed the dividend "stress" test. These 14 BDCs report sufficient annual cash flow yield to cover their anticipated annual dividend yield. The margin of excess is shown in the last column.

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Dividend Dogs Rule

The "dog" moniker was earned by stocks exhibiting three traits: (1) paying reliable, repeating dividends, (2) their prices fell to where (3) yield (dividend/price) grew higher than their peers. Thus, the highest yielding stocks in any collection became known as "dogs."

Dog Metrics Dug For Bargains From Lowest Priced Top Yield BDCs

Ten safest top BDC revenue stocks that showed the biggest yields as of August 5 per YCharts data sought to invest in profitable small to middle market private businesses, with revenues over $10 million, operating in lucrative niche industries. The top ten of 14 safe BDCs ranked themselves by yield as follows:

Actionable Conclusions: (1) Analysts Expect 5 Lowest Priced of Safe Ten High Yield BDC Dogs To Deliver 17.93% VS. (2) 11.68% Net Gains from All Ten by August, 2017

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So, $5,000 invested as $1k in each of the five lowest priced stocks in the safe ten BDC kennel by yield were determined by analyst one-year targets to deliver 59.30% more net gain than $5,000 invested as $.5k in all ten. The very lowest priced safe BDC dog, KCAP Financial, Inc (NASDAQ:KCAP), was projected to deliver the best net gain of 36.61%.

Lowest priced five safe BDC dogs as of August 5 were: KCAP Financial, Inc., Fifth Street Finance (NASDAQ:FSC), Apollo Investment (NASDAQ:AINV), TICC Capital (NASDAQ:TICC), Medley Capital (NYSE:MCC), with prices ranging from $4.04 to $7.29.

Higher priced five safe BDC dogs for August 5 were: Gladstone Capital (NASDAQ:GLAD), Prospect Capital (NASDAQ:PSEC), American Capital Senior Floating (NASDAQ:ACSF), OFS Capital (NASDAQ:OFS), CorEnergy Infrastructure Trust (NYSE:CORR), whose prices ranged from $8.27 to $29.74.

This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.

Some caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.

The net gain estimates mentioned 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.

See my instablog for specific instructions about how to best apply the dividend dog data featured in this article. - Fredrik Arnold

Stocks listed above were suggested only as possible starting points for your safest BDC dog dividend stock purchase research process. These were not recommendations.

Two business development pups qualify as valuable catches! They are among the now 50 Dogs Of The Week (DOTW) found on The Dividend Dog Catcher premium site. Click here to peruse and participate.

A top performing DOTW dog for the first quarter has been named. A second quarterly winner was discovered May 13. The third quarterly top gain dog will be announced August 22.

For a free copy of both quarterly reports and analysis of the winning Arnold Q1, Q2, & the coming Q3 August 22 picks, send your e-mail address, ticker symbol for your favorite dividend stock, and name of your favorite team of any sport or activity to: fredrika120@gmail.com. Remember: E-mail, ticker, team!

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.

Graphs and charts were compiled by Rydlun & Co., LLC from data derived from ycharts. com; finance.yahoo.com; analyst mean target price by Thomson/First Call in Yahoo Finance.

Disclosure: I am/we are long FSC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.