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| By Jim Nelson |
We recently covered why investors are seeking out safety right now. Gold is at all-time highs. More money is flowing into bond funds and dividend stocks than anytime in the past few years.
And the reason is simple. Tomorrow is “T-Day” — President Trump’s much-anticipated (and feared) tariff announcements.
With so much uncertainty hovering over the market, there’s little wonder why demand for income is high.
After all, income smooths out volatility in prices.
There’s no shortage of volatility these days. But finding solid income investments is more difficult than it used to be.
Today, the average S&P 500 stock only pays a 1.27% yield. Besides one short period in 2021, it hasn’t been this low since 2000.
Fortunately, there are a few types of stocks available that always pay above average.
And right now, Weiss Ratings is showing them as strong “Buys.”
Harness 10x Potential of Startups
Introducing business development companies, or BDCs …
These are (often) publicly traded companies that invest in smaller innovators or products you can’t get anywhere else.
The target companies can be small businesses just moving out of their garages. They can also be $100 million ones with products you’d easily recognize on your local store shelves.
Often, they are somewhere in between.
BDCs invest in them in several ways — direct equity stakes, debt financing through bonds or credit lines and hybrid structures that mix the debt with equity.
In return, BDCs can make money in a dozen different ways from these investments.
If they lend money or credit, BDCs will collect interest. If they own equity, any kind of exit or IPO could be a windfall.
You can probably already see how this is the perfect marriage between moonshot startups and stable income.
But it gets better …
Legally Required Distributions
Business development companies fall into a strange and rare category of equities. You might already know a bit about this if you own a real estate investment trust (REIT) or a master limited partnership (MLP).
All three are often called pass-through entities.
The reason becomes instantly clear. They pay no corporate taxes.
Instead, they must pass through a large portion — often 90% — of the income they make to their shareholders, trustees or partners.
Basically, income comes in … and income goes out.
All that debt interest that these BDCs collect works the same way as when a REIT collects rent payments …
It comes in, then goes out to their shareholders in dividends or distributions.
What makes BDCs even more exciting, however, is the types of portfolios they build.
Often, there are a few profitable businesses that just happen to be expanding. So, the income from those can be reliable.
To add to that dependable income, BDCs often hold a few moonshot startups with fascinating technologies or a pre-approved drug candidate.
So, if one of these moonshots strikes it rich, the BDC is legally required to add that windfall to the other income and pay its own shareholders.
That’s how you get the potential for big gains AND solid, steady dividend income.
3 BDCs to Triple Your Income
Some blue chips-stocks are known for being dividend machines. Think Procter & Gamble (PG) or Coca-Cola (KO).
But in today’s market, with interest rates still higher than they’ve been in over a decade, their current 2.4% and 2.9% yields are a bit weak.
Bonds are paying better, with the 10-year Treasury note paying 4.2%. But that’s still just about 1% better than inflation right now.
REITs are great for boosting your portfolio’s income. Yet, you still have to deal with value changes in the real estate market. That limits your options.
BDCs, however, blow all these away.
And it isn’t even close …
As you can see, BDCs pay more than twice what REITs do on average and more than 3x what even high-dividend stocks pay on average.
Only mortgage REITs pay more. But that’s a topic for another day … one that comes with its own risks.
Not every BDC is a winner, however. They, after all, do come with risks themselves — startups fail, debt obligations are missed, etc.
But of the few dozen out there, you can find a few worth checking out.
Here are three you might consider digging further into …
- Ares Capital (ARCC) is one of the largest BDCs you can buy today. It has a $26.8 billion portfolio of investments spread across 550 companies. For well diversified BDCs, the size and spread here is worth considering. It is also rated “B” by Weiss Ratings — a “Buy.”
- Main Street Capital (MAIN) is another well-known BDC with billions in investments … $8.1 billion to be exact. That’s spread out over 190 different companies. Compared to Ares, Main Street funds fewer, but often larger and more established, private equity opportunities. It comes with an even better “A-” rating.
- Hercules Capital (HTGC) is a smaller, yet more engaged BDC. It has $4.8 billion of investments made in its current portfolio, including a higher percentage of moonshot-type plays. Still, its growth makes it a “Buy” with a rating of “B-.”
All three pay substantial dividends.
Ares’ 8.7% yield tops the list. But don’t sleep on the other two names.
Even spreading an investment into all three will get you big yields and a diversified portfolio of startups.
But there is another way to get larger than average income from your investments. And with this strategy, you don’t have to wait months for your first dividend check to show up.
Instead, you can use what your Safe Money expert Nilus Mattive calls “60-Second Income.”
He will be laying out exactly what this is and how to use it to boost your yields above 10% at 2 p.m. Eastern today. You can watch him explain it live here.
Best,
Jim Nelson
