Business development companies thriving
Dear Mr. Berko:
In September 2009, I had a $183,000 certificate of deposit (CD) coming due and asked you to recommend some high-paying stocks. You told me to put half of the money in seven master limited partnership (MLP) pipeline stocks, all paying more than 10 percent, and told me to put the other half back into a CD. The MLP stocks have done very well, and six increased their dividend. The CD is coming due again, so could you again recommend some stocks paying between 8 percent and 10 percent? I can afford the risk, as I mentioned earlier.
P.L., Aurora, Ill.
Dear P.L.:
Some folks are familiar with entities called business development companies (BDCs). Many are public companies that help small companies become bigger and better by providing money for new machinery and equipment, balance sheet restructuring, mezzanine financing, commercial mortgages, mergers, spinoffs, takeovers, refinancing, factoring, inventory expansion, shareholder buybacks and the like.
BDCs are run like venture capital (VC) funds, but unlike VC firms, they allow smaller, non-accredited investors to have a shot at participating in investment-banking activities. And unlike VC firms, BDCs are structured like closed-end funds. Their shares trade on the major exchanges and must pay out 85 percent of their earnings – a huge portion of which (like the dividends of MLPs) is not taxable.
Today there may be quite a few BDCs with attractive long-term potential in this unique market environment. Before the great crash, banks stumbled over one another begging folks to borrow money.
Now most banks won’t lend you an umbrella on a rainy day unless they hold the umbrella factory as collateral. Why should they, when banks can borrow zillions from the Federal Reserve at zero interest and purchase 4 percent Treasury securities?
So for the foreseeable future and with the economy on a slow mend, the BDC sector should be a thriving business environment, sort of like shooting fish in a glass barrel. BDCs will invest up to tens of millions of dollars in small public or private companies, earn sweet consulting fees and a good rate of interest plus stock, and when the shares become ripe, they will be sold. Of course, the BDC shareholders get 85 percent of the profits.
There are 40-some publicly traded BDCs, and the following seven trade well below their highs of several years ago. I recommend them because I believe each has a better-than-modest potential for capital gains, that each – with one exception – pays a handsome dividend, and I believe each will increase its dividend this year and next.
I recommend that you invest $40,000 in the following BDCs and purchase a CD with the remaining $40,000. Invest equal amounts in each of these stocks: Apollo Investment Corp. (AINV-$12.12), paying 9.2 percent; Ares Capital Corp. (ARCC-$17.56), yielding 8 percent; PennantPark Investment Corp. (PNNT-$12.57), with an 8.6 percent return; TICC Capital Corp. (TICC-$12.26) at 7.8 percent; BlackRock Kelso Capital Corp. (BKCC-$12.75), yielding 10 percent; Kohlberg Capital Corp. (KCAP-$8.40), with an 8.1 percent return; and finally, American Capital Ltd. (ACAS-$9.16), which doesn’t pay a dividend, but probably will start doing so this year.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2011 Creators.com
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