Dear Mr. Berko:

I wanted to invest $10,000 in a highly leveraged mortgage real-estate investment trust (REIT) that pays a 14 percent dividend. My broker is adamantly against this idea, because he believes higher interest rates will reduce the REIT’s income and market value. Instead, he recommended Medley Capital, which pays only a 5.5 percent dividend that is partially non-taxable. He thinks its revenues and dividend will grow by 50 percent or more this year and next, and that the stock could trade at $15 or $16 in two years. Please advise me about Medley. I would buy 1,000 shares. I know it’s also a little risky, but I can handle that risk. – M.D., Troy, Mich.

Dear M.D.:

Medley Capital Corp. (MCC-$10.40) lights my hookah, butters my bagel and floats my tug. MCC is a classy business development company that provides capital and advisory services to middle-market companies in the United States and Canada. MCC’s 15 partners, analysts and principals have made 41 investments, typically between $30 million and $100 million each. Investors who know this company are impressed with its sophisticated deal structuring, its very careful due diligence and the active corporate participation of MCC’s management teams in the investments they make.

Management believes it can give investors 14 to 16 percent annual total returns through the coming five to eight years. MCC claims it can accomplish this with a portfolio of secured loans, subordinate loans (to a lesser extent) and equity participations where it is also the lender. Most of MCC’s private debt transactions are structured to combine equity and interest income.

Medley went public at $12 in January of this year, currently trades at two bucks under its $12.48 book value, has no debt and pays a 6.2 percent dividend. This year, Wall Street believes MCC will earn between 48 cents and 66 cents per share, but it expects 2012 earnings to come in between $1.22 and $1.53.

Meanwhile, UBS, Stifel Nicolaus and BB&T Capital Markets have a “strong buy” rating on MCC with a 12-month target price of $14 to $14.50. Stifel and UBS anticipate a dividend increase to $1.10. This would reward today’s shareholders with a current return of more than 10 percent; a good portion of that return (80 percent or so) will not be taxable. 

Firms like MCC are doing what commercial banks used to do a dozen years ago. Unfortunately, many of our banks can’t be bothered to make $30 million to $100 million loans to middle-market companies, earning 10 to 15 percent in fees plus interest. It’s more profitable to trade in currency futures, commodities, derivatives, stocks and bonds with free government money and 50 percent to 100 percent annual returns. So a growing number of firms like MCC are filling a void that was once the sole provenance of banksters.

Your broker appears to be all wool and a yard wide, and I’m comfortable with his MCC recommendation. I also think he’s spot-on with his $15.50 price projection by 2014 and a dividend of $1.45. So buy 1,000 shares, take your broker to lunch in the executive dining room at Taco Bell and give him a gold star.