Investors love dividend stocks, especially those with ultra-high yields, because they provide a substantial income stream and offer significant total return potential. Total return includes interest, capital gains, dividends, and distributions realized over time. In other words, the total return on an investment or a portfolio consists of income and stock appreciation. At 24/7 Wall St., we consistently emphasize the potential of total return to our readers. It is one of the most effective ways to enhance the prospects of overall investing success. Once again, total return refers to the collective increase in a stock’s value, including dividends.
24/7 Wall St. Key Points:
- When the Federal Reserve lowers rates, ultra-high-yield stocks could rally big
- Ultra-High-Yield stocks are passive income and total return champions
- With a fully valued stock market, ultra-high-yield stocks are likely a safer play now
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Business Development Companies (BDCs) are a type of publicly traded company in the U.S. designed to provide financing to small and mid-sized businesses. BDCs are regulated under the Investment Company Act of 1940 and focus on investing in private companies, often through debt or equity investments. They aim to generate income for investors by providing capital to businesses that may not have access to traditional financing.
Some of the key features of BDCs:
- Purpose: Support growing businesses by providing loans, mezzanine financing, or equity investments.
- Structure: Similar to REITs, BDCs must distribute at least 90% of their taxable income as dividends to shareholders to qualify for favorable tax treatment.
- Investments: Typically focus on private or distressed companies, offering higher yields but with increased risk.
- Accessibility: Traded on public stock exchanges, making them available to retail investors.
We screened our 24/7 Wall St. BDC research database. We found that three of our favorite companies in the sector are all outperforming the S&P 500 this year, and one in particular is crushing the venerable index. All are rated ‘Buy’ at the top Wall Street firms we cover.
Why do we cover Ultra-High-Yield dividend stocks?
While not suited for everybody, those trying to build strong passive income streams can do exceptionally well with some of these top companies in their portfolios. Paired with more conservative blue-chip dividend giants, investors can employ a barbell approach to generate substantial passive income streams.
Main Street Capital
Main Street Capital has helped over 200 private companies grow or transition by providing flexible private equity and debt capital solutions. This company is a favorite among Wall Street investors and offers a substantial dividend, up 15.44%, nearly double the S&P 500’s 8.49% return. Main Street Capital Corporation (NASDAQ: MAIN) is a private equity firm that provides equity capital to lower-middle market companies.
The firm also provides debt capital to middle-market companies for:
- Acquisitions
- Management buyouts
- Growth financings
- Recapitalizations
- Refinancing
The firm seeks to partner with entrepreneurs, business owners, and management teams, and generally provides “one-stop” financing alternatives within its lower middle-market portfolio.
Main Street Capital typically invests in lower-middle-market companies with annual revenues ranging from $10 million to $150 million.
The firm’s middle market debt investments are in businesses that are generally larger than its lower middle market portfolio companies. It also creates majority and minority equity.
RBC Capital has a Buy rating, but we were unable to confirm the target price.
Sixth Street Specialty Lending
This is another red-hot BDC that is outperforming the S&P 500, with an 18.21% gain compared to the S&P 500’s 8.49% gain. Sixth Street Specialty Lending Inc. (NYSE: TSLX) is a specialty finance company focused on lending to middle-market companies.
The Company seeks to generate current income primarily through direct originations of senior secured loans in United States-domiciled middle-market companies, as well as to a lesser extent, through originations of mezzanine loans and investments in corporate bonds, equity securities, and other instruments.
It invests in:
- First-lien debt
- Second-lien debt
- Mezzanine and unsecured
- Equity and other investments
The company’s first-lien debt may include:
- Stand-alone first-lien loans
- Last-out first-lien loans, which are loans that have a secondary priority behind super-senior first-out first-lien loans
- Unitranche loans, which are loans that combine features of first-lien and second-lien
- Mezzanine debt, generally in a first-lien position
- Secured corporate bonds with similar features to these categories of first-lien loans
Raymond James has assigned an Outperform rating with a target price of $23.
Trinity Capital
Based in Phoenix, this business development company pays a substantial dividend and has outperformed the S&P 500, returning 9.51% compared to the broader index’s 8.49% return. Trinity Capital, Inc. (NASDAQ: TRIN) is an internally managed, closed-end, non-diversified management investment company that operates as a business development company.
Trinity Capital is a specialty lending company that provides debt, including loans and equipment financing, to growth-stage companies, including venture-backed companies and companies with institutional equity investors.
Its investment objective is to generate current income and capital appreciation through its investments across five vertical markets.
The company seeks to achieve its investment objective by making investments consisting primarily of:
- Term loans
- Equipment financings
- Working capital loans
- Equity and equity-related investments
Its equipment financings involve loans for general or specific use, including the acquisition of equipment that is secured by the equipment or other assets of the portfolio company. It targets investments in growth-stage companies, which are typically private and often include companies backed by institutional investors.
UBS has a Buy rating with a $17.50 target price.
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