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These Companies Must Pay Out 90% of Their Earnings – Money Morning

Did you know there are companies that must pay out 90% of their earnings to shareholders?

They have to. By law. They can’t skimp out.

Not only that, they’ll pay you a high yield dividend. Much higher than dividend stocks or corporate bonds.

They’re not Canadian investment trusts or some exotically structured partnership where you have to worry about your money.

And get this. They’re part of private equity companies. Whether you like private equity or not, it’s where the smartest on Wall Street make their money.

I’ll show you where to find these high yield and growth gems…

They’re called Business Development Companies, or BDCs, and they’re private equity companies’ preferred vehicle for investing in and funding middle-market companies.

They’re also designed in a way that generally makes for very attractive yields of 8%-10% in many cases.

Another huge positive for many BDCs is that they’re sponsored by top-tier private equity companies. That gives them the financial backing, research support and fiscal gravitas to make deals happen.

As their name suggests, business development companies basically exist to help other companies grow and expand their operations. The fuel for this expansion is capital, and providing access to that capital is what BDCs are all about.

By loaning money and making direct investments in middle-market companies with $10 million to $1 billion in sales, BDCs provide the financial nourishment companies require to grow up big and strong.

BDCs Lend Where the Big Banks Won’t

Thanks to the Small Business Investment Incentive Act of 1980, BDCs were granted greater flexibility to issue derivative securities, and to use leverage in their financial operations. They’re also permitted to charge management fees.

What I really like about BDCs is that they provide a service that’s essential to the capitalist system.

By taking a chance and loaning to, and investing in, small- and middle-market companies, BDCs do what the big banks aren’t willing to do – namely, open up their wallets.

As you might imagine, loaning capital to middle-market companies can be a risky venture. The failure rate for mid-sized businesses is higher, and that means BDCs have to really know what they’re doing if they want to achieve a stellar return on equity.

On the flip side, however, the higher risk also makes the market less competitive and easier for resourceful players to have a competitive advantage.

The upside here in BDCs is that because the risks are high, the reward also is high-and that’s why BDCs generally offer outstanding yield along with big share price appreciation.

One great example of a BDC that’s extremely attractive to me is Apollo Investment Corporation (Nasdaq: AINV). The company provides direct investment capital, mezzanine loans and senior secured loans to middle-market firms.

One of the ways Apollo prefers to do this is via the issuance of warrants, convertible bonds and high-yield bonds. These vehicles offer far greater growth upside than plain vanilla corporate bonds currently yielding next to nothing.

Apollo has invested, or is currently invested, in a variety of companies throughout myriad industries, including cable television, direct marketing, energy and utilities and financial services, to name just a few.

Backed by its big brother, Apollo Global Management (NYSE: APO), little brother Apollo Investment benefits from the vision of one of the true masters of the financial universe, Apollo Global Founder and CEO, and billionaire, Leon Black.

From an income-seeker’s viewpoint, Apollo Investment is delivering big time, with an outstanding yield of 9.7%. You won’t get payouts like that from dividend stocks or corporate bonds, and you certainly won’t get that kind of yield from Uncle Sam’s Treasury bonds.

Along with private equity firms, BDCs can serve as a force multiplier in your arsenal of income-generating assets.

Robert also shows you how to actively manage your money for income gains. Read here.

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Syndicated repost courtesy of : Money Morning


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