“Receive $1,400 on May 30 … World’s Safest 9% Dividend” Dyson

I know many of my readers are dividend fiends, and I always appreciate a buck in my pocket as much as the next guy, so I thought this latest missive from Tom Dyson at Stansberry and Associates might be worth a look.

The ad actually began as a Daily Wealth article last month — back then it was the “World’s Safest 10% Dividend”, so the stock has probably gone up a bit in the last several weeks. Lately, though, the teaser has been that you can receive a payment of $1,400 at the end of this month … if only you’ll subscribe to Tom’s 12% Letter. This letter currently runs about $50 a year, though I’m sure it also comes with plenty of teaser emails for more expensive Stansberry services if you’re interested in a fuller mailbox.

We’ve looked at the 12% Letter several times — it’s a relatively low cost newsletter that focuses on high dividend stocks, and that’s a crowded business, but they have done a great job of marketing … the 12% Letter is responsible for everyone’s favorite 801k ads, and the original Escondido Retirement Trust ad, among several other memorable ones. Don’t know their long term record, but they do hire good copywriters. They’ve also cut the price — last year this one was a $99 letter, not sure why they’ve shaved the cost, but perhaps it’s in order to get more people in the door so they can pitch their more expensive monthly dividend research service.

And this time around, they’re teasing another monthly dividend payer, a Business Development Company that has a yield in the neighborhood of 9% and that Dyson thinks is safe.

What clues do we get for this one?

Well, they do pay a monthly dividend, and the next one is due on May 30. Not sure if that’s the payment date or the ex div date, though it hardly matters in the grand scheme of things.

It’s a business development company, which are firms that essentially raise money with debt and equity offerings, and lend that money out, usually to business that are too big to find bank loans a good solution, and too small to easily issue bonds. They’re sort of the junior players in the private equity world. And yes, since you ask, they have nearly all gotten clobbered due to the credit market turmoil — which might create some opportunity if you can pick the good ones from the truly challenged ones.

BDC’s operate essentially like REITs, as far as their dividends go — they get to be tax-exempt because they pass 90% of their income on to shareholders. That means you do have to pay full income taxes on BDC dividends, generally speaking, they’re not typically eligible for the 15% dividend tax rate (this is not always true, sometimes the payouts include return of capital or qualified dividend portions, too).

Other clues?

This particular BDC lend $10 million to a big outdoor advertising firm called Lindmark last year.

That’s about it. So … ready to feed this all into the Gumshoe’s Thinkolator? The hopper’s empty, so we’re all set …

Loud chewing sound …

This is Gladstone Capital (GLAD)

GLAD is a BDC that is managed by Gladstone Management, which also manages sister funds GAIN (private and public equity in small companies) and GOOD (commercial real estate).

They do really have a current 9% yield, and they do pay monthly (all the Gladstone funds appear to do so).

So what should we know about them?

Well, they’re managed by Gladstone, and they (and indirectly, their shareholders) pay a pretty hefty fee for that management before your returns and dividends are calculated — last time I checked they had a typical hedge fund fee structure, so they get 2% of assets and 20% of investment returns. That’s quite a bit. It’s comparable to similar funds from Apollo (like AINV) and others in that light that are managed by outside firms, but it tends to be quite a bit more expensive, management-wise, than the much larger BDCs like American Capital (ACAS) and Allied Capital (ALD), which are internally managed (so I suppose you’d have to consider their SG&A to be their “management fee”).

The dividend should be paid around the end of this month, as it is every month, but the ex date is probably the 18th, as it has been every month in recent history. That means you have to own it before that date to get the dividend.

But really, the $1,400 is not a likely payout for many of my readers — that would be the payout for 10,000 shares. 10,000 shares would cost you around $184,000 at the moment, which I know many of you could handle … but if you’re in that tax bracket, I hope you’re not too excited about one $1,400 dividend payment. The annual payout is about 9%, each month’s payout, at the current rate and share price, is about 3/4 of one percent. Certainly it adds up, but there’s no reason to rush to get this month’s dividend — you’ve got plenty of time to do your research and find out if this company is for you and there will, in all likelihood, be another dividend next month.

Is the dividend “safe”? Well, that all depends — the firm makes loans to their customers, sometimes taking equity as well, and if they’re like most of these kinds of firms they issue preferred stock, raise equity, and borrow money on the capital markets, often as lines of credit, to make those loans. As long as their customers make their payments, and the markets are willing to continue extending financing to Gladstone, some kind of profit is likely. As long as they make a profit, they have to dividend out the majority of it to shareholders. So you can judge for yourself if that meets your requirements for “safety,” which is always a hot button word here in Gumshoeland.

There are several companies that are prominent in this business — I’ve written about a few of them before when the Motley Fool ran a BDC teaser promotion last summer before the credit collapse, and we’ve also seen a few come up lately that are very similar kinds of companies — Quest Capital and CapitalSource, neither of which is technically a BDC (they’re structured as mortgage REITs), but both of whom operate in a very similar fashion. BDCs almost always have huge dividends, but they’re not always particularly steady (there are also some odd birds in this business, like Harris and Harris, which is a venture capital fund for nanotechnology masquerading as BDC … not profitable, so doesn’t pay dividends).

If you’re interested in exploring this kind of investment, I’d take the time to review the data that’s available at QuantumOnline.com — you’ll have to sign up for a free account if you want to review their stuff, but I’ve never had them abuse my email address or try to sell me anything, they are supported by donations just like your friendly neighborhood Stock Gumshoe. QuantumOnline won’t recommend anything, but they do have good listings of BDCs, various REITs, preferred stocks, and income trusts that can give you a starting point in your search for high-income investments.

Personally, though I’ve not looked at these recently, my tendency is to prefer the self-managed kinds of BDCs, and of those to prefer the larger ones — I like the stability of a much larger and more diverse loan portfolio, and I like the fact that management is motivated to keep costs down, and sometimes the hedge-fund management fee structure just bugs me. I have not looked in great detail at Gladstone, but I do note with some surprise that they seem to trade at a significant premium valuation compared with ACAS, ALD or AINV … I hope it’s not just because people like the monthly dividend, since I think we’re all capable of dividing by three.

These firms have almost all run into various kinds of trouble in the past few years (ALD, for example, has been attacked by short sellers who question their portfolio valuations, ACAS has had writedowns recently due in part to new accounting rules), so please read their filings and look for some in-depth articles or analyst reports for background, and research carefully before jumping in. Their filings and accounting can make your head spin, unfortunately, as with many financing companies.

And if you really like this idea, which is essentially a way of getting into private equity, you can always check out the PowerShares Listed Private Equity ETF which, though this is a bit misleading, holds several of these BDCs and their management companies in its top ten holdings (I wrote briefly about this last year as part of the teaser on the “Phipps Stock Market“). That ETF doesn’t pay those high dividends, of course, and it’s pretty expensive and does include a wacky assortment of companies, from Leucadia to Fortress Investment, that could be considered “private equity” in some way (“wacky” is not an indictment of the companies themselves, just a comment on how far they had to stretch to make a private equity ETF). There is no ETF for just the high-yielding BDCs, probably because there are only about eight or ten real BDCs, another dozen or so if you include mortgage REITs that do this kind of private equity/mezzanine lending … but I suppose you could easily build a portfolio of three or four that should represent the whole pretty nicely, should you be so inclined.

Full disclosure: I own shares of CapitalSource as of this writing, but do not own any other stock or investment noted. I do own units of Blackstone Group, which is related to this topic but not mentioned above.


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36 Comments on "“Receive $1,400 on May 30 … World’s Safest 9% Dividend” Dyson"

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farley 5
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farley 5
May 14, 2008 9:47 pm

OH MY GOODNESS! Gladstone Capital closed today at $18.50 – Just like April of 2003. This turkey is a one for 5 technical positive. It sits right on the Bullish Support line at $17.50. If it can’t hold, it goes to the 2003 low of $15.50. Why buy awful stocks when there are so many good ones out there? Whisper me and tell me how these newsletter folks stay in business. Thanks, FF5

jack
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jack
May 14, 2008 10:58 pm

newsletter guys stay in business because they just offer suggestions. unlike wall street hotshots that lie to you and waste your money, newsletter guys don’t invest your money. you do.

Joe
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Joe
May 15, 2008 9:20 am

you wouldn’t happen to be the Jack that works for Stansbury, would you?

Doug
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Doug
May 15, 2008 9:46 am

agree, technicals suck for this one, stay away.

BRUCE
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BRUCE
May 15, 2008 9:54 am

Well, I have liked these BDCs for a while now for a couple reasons. One, is that they have a decent performance record over the long run. I don’t see them as short term investments, but as a way to invest in private companies during the development stages. I have shares in the following: Allied Capital (ALD), Gladstone (GAIN), Apollo, and Harris & Harris (TINY).

G IMBURG
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G IMBURG
May 15, 2008 10:06 am

I THINK THE READERS COULD MAKE MORE MONEY IF THEY SOLD COVERED CALLS ON A STABLE DIVIDEND PAYING STOCK THAT TIMES THE DIVIDEND TO THE SALE OF THE CALLS.

RUSTY
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RUSTY
May 15, 2008 10:25 am

I’ll stick to my canroys and mlps. Visa is going to double by year end

RUSTY
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RUSTY
May 15, 2008 10:29 am

(I’m referring to today’s price)

jack
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jack
May 15, 2008 10:45 am

Joe, nope.

Elissa Stein
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Elissa Stein
May 15, 2008 10:54 am

The way Gladstone’s chart look, it’s a possible short play. But, I found no options chain for it-so it doesn’t trade options. I’d stay away.

Mike
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Mike
May 15, 2008 10:56 am

Rusty, which canroys you like? I’m in HTE for their big divi’s. Anybody know anything about CLMT-they too pay a good divi-I’m just starting to researce them.
Anybody have any opinion on them? How about you Gumshoe?

SageNot
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SageNot
May 15, 2008 11:06 am

Geez, GLAD is in a declining “going nowhere” phase since before 2003, it’s no mystery as to why the Div. is higher at the bottoms, is there? Mark Skousen, a very bright guy normally, has so many losers lately that I finally cancelled his cheaper service, because he brags loudly about how much his hedge fund is making & another JV investment that he works with others. http://finance.yahoo.com/q/ta?s=GLAD&t=my&l=on&z=m&q=l&p=&a=&c=

What about us Mark?

His dedication to ALD (a book has slammed this mgmt.) astonishes me, he has a PhD, & he can’t understand ALD’s mgmt. goofs?

SageNot
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SageNot
May 15, 2008 11:08 am

Mike, look before you leap, CLMT is in FREE-FALL.

http://finance.yahoo.com/q/ta?s=CLMT

Bev Fehrenbacher
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Bev Fehrenbacher
May 15, 2008 11:41 am

Really enjoy your site Gumshoe! Would like you to evaluate/discuss Richard Band’s latest push for MLP’s.

destry
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destry
May 15, 2008 12:25 pm

You guys are more fun than a rock
fight over an open grave.

farley 5
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farley 5
May 15, 2008 12:25 pm

Mike – listen to SageNot. The only thing you need to know about CLMT is supply and demand. Please take a look at this picture.

http://stockcharts.com/def/servlet/SC.pnf?c=clmt,P

Blue good – red bad

Shawn
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Shawn
May 15, 2008 1:09 pm

I hope many of your readers take you up on your suggestion to do some of their research on Quantum Online. I have found that sight to be invaluable over the years.

For instance you can use it to find preferred shares and a huge variety of derivative instruments. It includes links to the original prospectus, maturity dates and information on qualified dividends. dividend rates etc.

Gukdorak
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Gukdorak
May 15, 2008 3:05 pm

I far prefer ACAS to GLAD as a BDC.
GLAD hasn’t raised it dividends in sevral years while ACAS has like clockwork.

SageNot
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SageNot
May 15, 2008 3:43 pm

ACAS didn’t lose as much capital either; but tell us Gukdorak, where do they borrow the money to pay such high Divs., there’s NO earnings?

http://finance.yahoo.com/q/ta?s=ACAS&t=5y&l=on&z=m&q=l&p=&a=&c=glad

Mattrock62
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Mattrock62
May 15, 2008 4:02 pm

I bought CSE at $11 with a 24% dividend. It dipped to $9.58 and is now $15+, all in 3 months time. They lend money to commercial accounts. I think they are an REIT but are well managed.

tor
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tor
May 15, 2008 5:21 pm

For a list of 18 BDC’s go to The Motley Fool CAPS site/Tags Quotes or Google “Business Development Company”. Add PNNT and BKCC to the list of 18. GLAD and GAIN are the only two that pay monthly.All the others are quarterly. In addition find Steve Sjuggarud’s Daily Wealth of 2/29/2008 for a plot of these dividends vs.a BDC’s Index.He claims that buying now will give you both high yield and growth since they are so low at this time.

david young
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david young
May 15, 2008 7:40 pm

kudos

david young
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david young
May 15, 2008 7:43 pm

based on misrepresentation, i own gain at a hughe loss

destry
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destry
May 15, 2008 10:10 pm
Allied Capital was started in 1958 by ex-FBI agent David Gladstone.(Who also began GLAD after leaving Allied Capital). Allied has raised it’s dividend every year for the past 30 years…And has averaged an average annual return of17 1/2% since 1963. Greenlight Capital hedge fund (David Einhorn), has every few years made claims against Allied, coinciding with selling the stock short(A happy coincidence, of course)… Every court has rejected Einhorns claims as”false and “unsubstantiated”…The latest judge to dismiss Greenlights claims, make mention of his thought that the charges were made to drive the “shorted”stock down in value. Employees own 8% of… Read more »
SageNot
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SageNot
May 16, 2008 9:55 am
Did you read David Einhorn’s book Destry? What facts are you disputing? Why would ALG go after David’s wife? So what if she worked for Barron’s, who the hell is ALD to stoop to that level? This isn’t a Yahoo board Destry, as long as GumShoe doesn’t mind, we contribute info that we find helpful, but if you’re miffed about your “book” that’s personal, & shouldn’t be aired here, agree? I erred when I stated that Mark Skousen still owned ALD, one of his all time faves. He cashed out in 12/07 upon ALD hitting his stop. Harvard graduates these… Read more »
SageNot
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SageNot
May 16, 2008 10:04 am

Shame on me, I forgot this 5yr look-back. Who wouldn’t be proudNOT over this performance?

http://finance.yahoo.com/q/ta?s=ALD&t=5y&l=on&z=m&q=l&p=m50,m200&a=&c=

Maybe you thought that ALD was a land-based “tanker stock,” eh? Gotta give Skousen credit though, he jumped ship just in time!

jimarb
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jimarb
May 16, 2008 2:47 pm

have owned ACAS three times in the last five years for 30 , 35, & 40 % – easy money – looks like there ready to roll again – the banks are sure harder to borrow from now and business needs capital

Gravity Switch
Admin
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May 16, 2008 2:49 pm
Don’t particularly wish to share an opinion about ALD, but in their defense that five year chart (which shows their share price more or less unchanged now after a long climb and a quick fall) does not reflect dividends, which have been an average of probably 8%+ a year over that time. Not awful. Of course, it would have been better to sell the shares last year, but the same can be said of almost any financial company — some of them are no doubt worth buying now even though they’ve gone down — the key is knowing which ones.… Read more »
Mike Sager
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Mike Sager
May 16, 2008 3:54 pm

G Imburg do you have any stocks that you would suggest to use the covered calls with?

at_the_track
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at_the_track
May 16, 2008 7:50 pm

if it’s a dividend you’re looking for, look at CHI. It’s paying 11% and is earning more than it’s paying.

Gravity Switch
Admin
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May 16, 2008 7:58 pm

Thanks at-the-track — sounds like they’ve been working through their auction rate debt refinancing, glad you’re happy with them (for eveyone else, CHI is a closed end fund that uses leverage and holds convertible debt — trades at a bit of a premium now, so folks must be less worried than they were a couple months ago when it was discounted.)

destry
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destry
May 16, 2008 11:23 pm
SageNot, I’m more surprised to see my response than I am at yours’….I accidentally double-click, and thought the computer was assuring me my labors were on a collision course with Jupiter (God, I miss the 16th Century!). I’d never heard of a book having been written about ALD…I was astonished,but less-so, when I noticed it was written by Einhorn himself…Now there’s an unimpeachable source…. While several words didn’t make…I’ll stand by the rest… I shouldn’t then have switched horses on you. My comment about the 24% dividend,was not meant to imply I thought that MatRocks 24% dividend CSI, was a… Read more »
destry
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destry
May 16, 2008 11:24 pm

“HUZZAH!!!”

jeff furlong
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jeff furlong
May 22, 2008 11:43 pm

howcome noone mentioned O which is “The Monthly Divedend company.They also offer OUI which seems to pay the most. I am thinking of buying 50 shares checking my monthly payoff and cashing in my 401k to load up on this “sure thing” ) which has been paying every month for something like 43 years.any opinions??
JEFF

destry
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destry
May 26, 2008 1:32 am

Don’t do that!!!
Don’t load up on anything….
“O”; Realty Income, is a wonderful company….
And over the recent years, there have come more
wonderful opportunities for great monthly dividends,in growing companies. And don’t forget
the quarterly income dividend companies.
You want to plan a little better, when a dividend
comes each 3 months, instead of every month;
It’s do-able. I believe in diversification.
By all means consider Realty income…
But buy some other companies as well….
Amigo; There is no such thing as a “Sure Thing”.

farley 5
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farley 5
May 26, 2008 9:42 am

O was recently downgraded by RJ&A to Market Perform due to lower EPS guidance from Management and much higher vacencies from the Crest division. This division was started 8 years ago. The credit crunch has crimped their style as financing for buyers has dried up. Chart is ugly with 2 out of 5 positive. Not worth the 6% dividend in my view.

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