Three Unique Dividend Companies You’ve Never Heard Of

The assault on income continues. 

The philosopher kings at the Federal Reserve announced last month that they will continue to buy long-term debt to replace maturing short-term debt. That means rates on traditional sources of safe income will remain at today's dismal levels for years to come. 

The table below reveals just how dismal income levels are and just how successful the Fed has been in its objective to dissuade savings. 

Five-Year Bank CD (2007)

Five-Year Bank CD (Today)

10-Year Treasury Note (2007)

10-Year Treasury Note (Today)

High-Grade Corporate Bonds (2007)

High-Grade Corporate Bonds (Today)

5.45%

1.75%

5.10%

1.50%

6.0%

3.25%

Fewer income investors are willing to tolerate investments that don't compensate for inflation, much less provide a real return. That's why dividend-paying stocks have become the new bonds. Equity is where more fixed-income investors are turning to secure income. Investor interest is evident in the rising share price of many quality dividend payers. 

Looking at the dividend growers in my High Yield Wealth portfolio, I see a 16% total return from AT&T (NYSE: T), a 25% total return from McDonald's (NYSE: MCD), a 29% total return from McCormick & Company (NYSE: MKC), and a 35% total return from Altria (NYSE: MO). These stocks have become so popular over the past year because they provide much of the income lost in the fixed-income market. 

These companies I mention are great, to be sure. The problem is that their popularity has dropped their yield. That can be a turn-off to investors who demand more income per dollar invested. 

So what’s a yield-starved investor to do?

Because of the soaring popularity of blue-chip dividend payers, more investors are turning to master limited partnerships (MLP). These are pass-through entities that must pay at least 90% of their taxable income to investors. Many of these issues provide yields double those of blue-chip dividend stocks, and three to four times that of the 10-year Treasury note. 

Back in February, I recommended five master limited partnerships in energy, which has always been a great space to vet income. In April, I added the energy firm Calumet Specialty Products LP (NYSE: CLMT). This stock yields more than 9% and has increased its payout two consecutive quarters, to the benefit of the High Yield Wealth portfolio. 

These days, I'm finding even more yield and better value outside of energy. Business development companies (BDCs) are particularly attractive. BDCs are MLPs that resemble banks: they borrow at a low rate and then lend at a higher one. The difference is that they lend primarily to middle-market private firms. That is, BDCs lend to firms that generate $20 million to $200 million in annual revenue. 

I first ventured into the BDC space in February 2011, when I added Ares Capital (NASDAQ: ARCC) to the High Yield Wealth portfolio. Ares has already paid $2.15 in dividends per share on the initial investment since I recommended it. As I write, Ares yields 9%, and is even a better value today than when I recommended it 18 months ago based on its forward 10 P/E multiple. 

Earlier this month, I added two more BDCs to the High Yield Wealth portfolio. These are unique BDCs. One yields 11% and pays dividends monthly. The other yields close to 8% and specializes in lending on an asset that has never generated a loss!

What's more, both BDCs have a history of continually raising their payouts. Both are also values: one has a forward P/E multiple of 9, the other 11. 

These two new BDCs have helped lift the overall yield on the High Yield Wealth portfolio nearly a full percentage point to close to 7%. 

I don't expect value to remain in the BDC sector forever. I see the same cycling in of investors that has occurred in the blue-chip dividend growers, many of which no longer provide the income bang for the investment buck that they did a couple years ago. 

BDCs provide that bang today. But as more income-starved investors search new venues for dependable income, I expect that bang to diminish over time.

Published by Wyatt Investment Research at