After several obituaries have been written and having witnessed near death experiences, dividend investing keeps coming up stronger and fitter.
This investment style has its own merits and will probably never go out of fashion but what if great dividends are complemented with capital appreciation prospects. Investment companies with a strong focus on debt disbursals such as Golub Capital BDC Inc (NASDAQ:GBDC), Hercules Technology Growth Capital Inc (NYSE:HTGC), and Medley Capital Corp (NYSE:MCC) present such opportunities:
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Abacab Asset Management's flagship investment fund, the Abacab Fund, had a "very strong" 2020, returning 25.9% net, that's according to a copy of the firm's year-end letter to investors, which ValueWalk has been able to review. Commenting on the investment environment last year, the fund manager noted that, due to the accelerated adoption of many Read More
Illinois based Golub Capital BDC Inc (NASDAQ:GBDC) makes debt and minority equity investments in middle-market companies that are sponsored by private equity investors. Golub’s investment strategy is to focus on companies which are already backed by private equity firms. While this raises profile of its portfolio, it also helps in keeping bad debts to the minimum levels.
Apart from a fantastic dividend yield of 7.6 percent, another reason to look favorably at this company is the fact that it primarily focuses on offering debt to growth companies. For the fourth quarter of 2012, Golub Capital’s debt investments stood at $743 million out of the total of $768 million.
Similarly, a vast majority of its investments are in the form of senior secured and one stop loans which offer enhanced security of capital. One stop is a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans. All these factors mean the stock is currently sitting on annual gains in excess of 20 percent and still looking strong.
Hercules Technology Growth Capital Inc (NYSE:HTGC) also operates on similar lines though its universe of target companies is limited to technology-related businesses. It invests in development stage companies in the form of debt and equity growth capital.
Trading at a trailing 12-months price earnings ratio of 12.7, the stock offers a dividend yield of 8.5 percent. Like Golub, Hercules too focuses on disbursing loans instead of equity to its portfolio companies. As on 31 December 2012, over 94 percent of its investment was in the form of senior secured debt with and without warrants. The stock has seen a smart rally of 16.5 percent over the year but what could bring another bout of buying interest is initial public offering from two of the receivers of its funds – iWatt and Paratek Pharmaceuticals. Hercules Technology holds preferred shares in these companies and while the monetary value is not much, an IPO will likely bring some media coverage.
Medley Capital Corp (NYSE:MCC) lends directly to privately held middle market companies. As the economic situation improved in the U.S., last year was truly rewarding for investors in this investment company. This is not only a dividend champion, with nearly double digit annual yield but has also rewarded investors with nearly 47 percent in capital appreciation.
During the last year, Medley Capital’s net investment income doubled to $9.6 million leading to an increase in dividends. Despite the sharp run up in the stock in 2012, it trades at a historic price earnings ratio of 10.7 which reduces to 9.5 on a forward basis. Compared to its peers, the company is geared less with debt which is another positive. It is no wonder then that UBS has a buy rating on the stock with a price target of $17.5, indicating an upside of 18.5 percent.
The downside with these companies is that they almost never see the kind of growth or valuation boosts that some of their portfolio companies may witness. However, it is balanced out pretty well by a strong stream of dividend income. One of the most important factors to keep an eye on while investing in such companies is the state of economic growth and interest rates as unfavorable movements in these factors can lead to a rise in bad debts.