Finding Income in the Markets
It's not easy to find income in the markets these days. Treasuries yield less than 5%, which doesn't leave much left over after taxes and inflation. The stock market's average dividend yield is less than 2%. Even real estate investment trusts, a favored high-income vehicle to park in retirement accounts, pay out only 3.5%, after the enormous run-up in REIT stock prices over the past seven years.
Bryan Perry makes a living by searching in the nooks and crannies of the markets for stocks that make generous annual payouts, increase their dividends each year and carry relatively low risk. If you can find companies that make distributions that beat inflation and return much more than bonds, he reasons, you'll probably also benefit from stock price appreciation. Perry applies these principles in a newsletter he edits, The 25% Cash Machine, and in a book of the same name he published this year with John Wile & ySons. He also manages money for clients in need of high annual investment income.
One of Perry's favorite sectors is business development companies. These are publicly traded investment companies that extend loans or invest in small and midsize private enterprises. A typical lending rate is 12% to 13%, and there could be hundreds of corporate customers in a BDC portfolio. BDCs, like REITs, are required to pay out at least 90% of their ordinary taxable income to shareholders, which accounts for their lush dividends.
Perry currently recommends four BDCs. American Capital Strategies (symbol ACAS), the industry leader, yields 7.8% and closed April 13 at $45.92. This stock has returned a staggering 24% annualized since its listing in 1997. Ares Capital (ARCC) and Apollo Investment Corp. (AINV) are both much younger companies that grew out of venerable private equity funds. Ares closed at $18.32 and yields 9%; Apollo closed at $21.37 and yields 9.4%. With borrowers coming from many industries, all three of these are broadly diversified. Perry's fourth pick, Prospect Energy Corp. (PSEC) focuses on the energy sector. It closed at $17.56 and yields 8.6%.
As with REITs, tax-deferred accounts make the best home for BDCs.