Recently retired from a 40 year career in agriculture without a defined pension plan, I find myself relying on accumulated wealth and my wits to finance my retirement with a little boost from social security. 2012 has been a banner year for dividend paying stocks, mostly due to the anemic returns from the alternatives, i.e, treasuries, CDs and savings accounts. To generate income, I maintain positions in my own "nifty fifty," which is comprised of carefully screened common stocks, preferred stocks, closed end funds, and master limited partnerships. I am extremely happy with the performance of this portfolio to date which is currently yielding over 6% based on cost. For those interested in viewing the list, click here.
So what's the problem? The quest for reliable income has unleashed a tsunami of buyers piling into these issues that have driven prices higher. While I'm not complaining about the rising market prices of the portfolio, I am in quandary about what to do next. Yes I can sell and lock in some nice capital gains, but where will I park the proceeds? I plan on living at least another twenty years, so I need to ensure a steady stream of income. An argument can be made that a portfolio of 50 stocks borders on being over-diversified. Guilty as charged! However I actively manage and cull this list by occasionally dropping one off in favor of a new discovery. It's what I do.
Now that it has become harder and harder to find reliable income gems at reasonable prices, I have added a new category to my investment alternatives - Business Development Companies. Business Development Companies trade on the exchanges just like stocks, and routinely sport dividend yields in the 10% range. Think of them as Private Equity companies for the individual investor. Like anything else, due diligence is required to separate the wheat from the chaff. While there are around 25 listed BDC's, there are two that recently caught my eye. The first one is Main Street Capital (MAIN), and the second one is Compass Diversified Holdings (CODI).
Main Street Capital is a principal investment firm that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. Main Street's portfolio investments are typically greared towards management buyouts, recapitalizations, refinancings and acquisitions of companies that operate in diverse industry sectors. Main Street partners with entrepreneurs, business owners and management teams and generally provides "one-stop" financing alternatives within its lower middle market portfolio. Main Street's lower middle market companies generally have annual revenues between $10 million and $150 million.
Compass Diversified Holdings acquires controlling interests in profitable small to middle market businesses in attractive niche industries. They work with the management of those companies to pursue growth opportunities, provide strategic support and increase cash flow. An investment in Compass can provide investors an opportunity to participate in the ownership and growth of businesses that traditionally have been owned and managed by private equity firms, wealthy individuals or families or large corporations.
Listed below are a few metrics supporting my positive outlook on these companies.
Recent Share Price
EPS Growth YOY
Rev Growth YOY
Rev Growth 5 years