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8% Yields from Special Banks

Posts by Ian Wyatt

Welcome to Income & Prosperity, the latest service from Wyatt Investment Research.

Income & Prosperity is all about earning a safe and steady income. In a world of 0% interest rates, that is easier said than done.

But even in this world, there are great income opportunities. Since artificially low interest rates are a product of our financial system, it should come as no surprise that companies in the banking sector are booming.

Firms like Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM) have more than doubled since bottoming out during the financial crisis. But for income investors, these big banks aren’t very attractive.

The good news is that there’s a slightly different type of financial firm that pays much bigger yields.

These high-yield financial companies are known as Business Development Corporations, or BDCs. With yields of 7-11%, these stocks are very attractive for income investors. For this reason, I like to call these “special banks” – even though they are technically not banks.

A dividend of this size is considerable, and far higher than the big banks. For example, JPMorgan and Wells Fargo (NYSE: WFC) each pay investors a 3% dividend yield. And Bank of America (NYSE: BAC) offers just a 0.3% dividend.

In many ways, BDCs operate like conventional banks did back in the old days. A BDC raises capital and makes loans to businesses in need of cash. Most loans are to small- and medium-sized businesses looking for expansion capital. And the BDC earns a profit on the “spread” on every loan.

Unlike most big banks, BDCs are simple businesses.  There is no proprietary trading desk, credit default swaps, or toxic assets hidden in off-balance sheet partnerships. As a result, they’re relatively easy to understand and analyze.

I know in my investment account, I like to keep things simple. And that’s the appeal of BDCs. These are financial stocks that are not complex financial machines. As a result, they offer investors far less risk.

The best news for income investors, of course, is the yield. Many BDCs pay dividends that are two to even three times that of the highest yielding big banks.

I’ve been recommending these types of investments for a couple of years now. In fact, I personally bought my first BDC back in early 2011. Since then, my shares have increased in value by 11%.  Now that might not sound like much, but …

I’ve also earned considerable dividends. At the time I bought this “special bank,” the dividend was 8.2%. Since I didn’t need the income, I’ve been reinvesting those dividends. And those dividends have given me an additional 21% gain on this one stock.

That total return of 32% is well ahead of the 23% rise for the S&P 500 Index during the same time period. Thanks to a growing dividend, my favorite BDC still has a substantial dividend yield of 8.4% today.

Now, there are many high-yield BDCs worth considering. But as with every investment, quality is far more important than yield.

Today, BDCs remain one high-yield investment that hasn’t become a “crowded trade.” That’s because most investors have never heard of a BDC.

But that will change. The healthy yields, financial transparency and solid stock performance will soon attract more investors. So now is a great time to dig into this off-the-beaten-path investment.

It’s not too late to find attractive yield from the still-recovering financial sector – you just need to know where to find it.

Look for more on BDCs in upcoming issues of Income & Prosperity. If you’ve had some experience with this type of investment in your own account, I would love to hear from you.  And if you have questions that you would like answered in the coming days, just drop me a line at editor@incomeandprosperity.com.