Banking & Finance

3 Buy-Rated Business Development Companies Pay Some of Wall Street's Highest Dividends

The song remains the same, and it will for the foreseeable future. The Federal Reserve probably will not be raising rates until late 2022, so we remain in a setting with coupons on government securities still close to generational lows. Certificates of deposit at banks are wretched, with the best five-year rate we could find at a paltry 1.40%, and that was for a $100,000 deposit. Quality investment-grade corporate and municipal bonds? Same story.

So what are balanced growth and income investors to do? The potential for capital appreciation on low coupon bonds is negligible, and with the market possibly primed for a big sell-off, risky high-yield or leveraged funds don’t make any sense for those with low risk tolerance. What does make sense is looking at the business development stocks that pay outsized dividends and offer growth potential.

Business development companies (BDCs) are organizations that invest in small and medium-sized companies, as well as distressed companies. A BDC helps these firms grow in the initial stages of their development or regain sound financial footing.

We found three such stocks that are Buy rated across Wall Street and pay at least a 10% dividend. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

FS KKR Capital

This is a very well-known name on Wall Street and it offers a solid entry point at current levels. FS KKR Capital Corp. (NASDAQ: FSK) specializes in investments in debt securities. It seeks to purchase interests in loans through secondary market transactions or directly from the target companies as primary market investments.

The company also seeks to invest in first lien senior secured loans, second lien secured loans and, to a lesser extent, subordinated or mezzanine loans. In connection with the debt investments, the BDC also receives equity interests such as warrants or options as additional consideration. It also seeks to purchase minority interests in the form of common or preferred equity in target companies, either in conjunction with one of the debt investments or through a co-investment with a financial sponsor.

Additionally, on an opportunistic basis, the fund also may invest in corporate bonds and similar debt securities. The fund does not seek to invest in start-up companies, turnaround situations or companies with speculative business plans. It seeks to invest in small and middle-market companies based in the United States. The fund seeks to invest in firms with annual revenue between $10.0 million to $2.5 billion. It seeks to exit from securities by selling them in a privately negotiated over-the-counter market.

The company just posted stellar quarterly results, announced a huge stock buyback and raised the dividend from $0.60 per share to $0.65.

Shareholders receive an 11.44% dividend. Hovde analysts have a $23 price target on the shares, and the consensus target is $22.57. The stock closed on Tuesday at $22.71 a share.