Some investors and analysts believe there is a dividend stock bubble. It's true that many dividend stocks are trading near 52-week highs and that has pushed yields down to about 3% or less for many popular dividend stocks. However, there are high-yielding stocks that still appear to make sense, as investors remain well-compensated for taking the risk of stock ownership in some high-yield stocks.
A recent article on Seeking Alpha titled "Yes, There Is A (High-Yield) Dividend Bubble", questions whether real estate investment trust stocks like Annaly Capital Management, Inc. (NLY) and American Capital Agency Corp. (AGNC) are in a bubble. However, both those stocks appear to be trading at reasonable levels (just slightly above book value), especially considering the low interest rate environment we are in.
Investors who have bought and held mortgage REIT stocks have generally done extremely well and that trend appears likely to continue. However, investors should not invest too heavily in one sector (like mortgage REIT stocks), and that is why other stocks that provide high yields also can make sense.
BlackRock Kelso Capital Corporation (BKCC) is a specialty finance firm that provides funding to middle-market companies. It offers a variety of solutions and makes debt investments through senior and junior secured loans, unsecured and subordinated debt securities and loans, and it also makes equity investments.
BlackRock Kelso Capital was formed in 2005 by management from two firms: BlackRock, Inc. (BLK) and principals of Kelso & Company. This gives the company an edge as members of the investment team have substantial experience in this industry. It typically invests between $10 million and $50 million per transaction, and it focuses on companies that generate positive cash flow.
Since BlackRock Kelso Capital is set up as a business development company, and because it uses leverage, it is able to generate and pay shareholders a very generous dividend yield. This company makes investments in a wide range of industries including: manufacturing, software, publishing, education, homebuilding, financial services, healthcare, electronics and many more.
BlackRock Kelso Capital's industry diversification reduces risks for the company and shareholders. It has made investments in companies such as: Grocery Outlet, Inc., Ascend Learning LLC., Advanced Lighting Technologies, Inc., Sur La Table, Inc., among others.
Here are two additional reasons to consider buying the stock:
1) This company recently reported solid financial results. For the second quarter of 2012, it announced net investment income of 30 cents per share and earnings per share of 29 cents per share. It also declared a quarterly dividend of 26 cents per share. As of June 30, 2012, net asset value (also known as book value), was $9.61 per share.
2) This company has a solid history of paying dividends. It has paid a dividend every quarter, since the company was formed in 2005. Plus, it's not just any dividend, the current yield is over 10%, which means it could outperform many other investments in the coming years. For example, over the next five years, the dividend income alone could generate gains of over 50% for shareholders. Compare that to what some popular dividend stocks yield and it's easy to see why this stock makes sense for income investors, especially on dips.
Here are some key points for BKCC:
- Current share price: $10.11
- The 52 week range is $6.30 to $10.34
- Earnings estimates for 2012: 97 cents per share
- Earnings estimates for 2013: $1.03 per share
- Annual dividend: $1.04 per share, which yields about 10.2%
Data is sourced from Yahoo Finance.
Disclaimer: 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.