The ongoing search for yields above the pathetically low rate of U.S. Treasuries has been the holy grail of investors and savers alike for years now. One group of stocks that seems to be consistently overlooked by many investors are the business development companies (or BDCs). Oppenheimer recently spotlighted these companies that generate revenue, usually from loans, and came out with a list of names that may satisfy even the most yield-hungry investors.
In its report, Oppenheimer points out that BDCs have performed exceptionally well with a total return of 17% in the past year and up 3.8% in the first quarter. Nearly half of this return has come from share price appreciation. While the analysts stress that investors should not expect a repeat of that performance, they do still view the sector favorably and think the stocks still are valued fairly at an average of 1.0x net asset value (NAV). Plus, an average 9.5% dividend yield is nothing to sneeze at in this environment, especially with the current level of dividend payouts as seeming very secure over the visible investment horizon.
By carefully researching the BDCs’ mostly middle-market loan portfolios, and examining closely company financials, the analysts at Oppenheimer have come up with some names that stand out.
Fidus Investment Corp. (NASDAQ: FDUS) is an Oppenheimer stock to buy. It has had an average annual total return of more than 18% since the company’s 2007 initial public offering (IPO). The Oppenheimer price target is $18. The Thomson/First Call estimate is $21. Investors are paid a 8.30% dividend.
Stellus Capital Investment Corp. (NYSE: SCM) was a new IPO offering last year. Management recently agreed to waive incentive fees, and that bodes well for investors. The Oppenheimer price target for the stock is $16. The Wall St. estimate is also $16. Based on its first dividend to investors of $0.34 per share, the company will be paying a 9.21% dividend.
Orchard First Source Capital Corp. (NASDAQ: OFS) is another recent IPO. With its solid portfolio of $227.5 million in senior secured loans and a 64% ownership in an additional fund, investors are well diversified. The Oppenheimer price target for the stock is $16, while the consensus target is $15.50. The dividend is expected to be 9.4%.
TCP Capital Corp. (NASDAQ: TCPC) rounds out the top four stocks. With one of the friendliest shareholder fee structures among the BDCs, this stock has the ability to provide more return for its shareholders. The Oppenheimer price target is $17. The consensus target is $16.63. Investors can expect a 9.13% dividend.
Other high-yielding BDCs mentioned in the Oppenheimer report, but not covered include: Prospect Capital Corp. (NASDAQ: PSEC), yielding 12.20%; TICC Capital Corp. (NASDAQ: TICC), yielding 12.20%’ BlackRock Kelso Capital Corp. (NASDAQ: BKCC), yielding 10.70%; PennantPark Investment Corp. (NASDAQ: PNNT), yielding 10.3%; and Solar Capital Ltd. (NASDAQ: SLRC), yielding 10.40%.
One important item for investors to be aware of is that these names often do secondary offerings to raise additional capital to provide loans and mezzanine financing. It may be smart to check before buying any of these stocks to see if an offering is on the horizon. If that is the case, then waiting to purchase after the offering may be the best strategy.