I write about Bryan Perry’s Cash Machine every now and again — he’s generally focused on high-yield stocks, and he has pitched a variety of them over the years, from telecoms to MLPs to BDCs, anything that sports a nice, high payout.
This time around, though, he made a promise that caught my attention — here’s what he said:
“Once You Grab Your First Payday, You’ll Never Put Your Money in a CD Again
“That’s because you’ll not only be getting over 10 times more money than a 1-year CD, but you’ll also know that your money will be equally as safe.
“This is why Wall Street’s biggest insiders are already in on this deal!”
Your money will be “equally as safe” as in a 1-year CD? Either he’s got a wildly pessimistic opinion about the FDIC and it’s ability to guarantee the value of your Certificate of Deposit down at the bank, or he’s on to something remarkable. Or, of course, he could just be, well, exaggerating.
And frankly, we’re a bit short on time here at HQ today so I’m going to make this quick: No way is this investment as safe as a CD if “guaranteed return of capital” is what you mean by safety. I can tell that even without telling you the name of the stock just yet, because he lets slip a few paragaphs later that he’s teasing a Business Development Company (BDC), which is basically like a pass-through small business lender — they borrow money cheap at short term rates, including money from the government’s funding for small business loans, and they lend it out at much higher rates to small and mid-size companies. They have similar tax status to REITs or MLPs, which is why they have such high payouts — they pass the tax obligation on to shareholders and don’t pay any corporate tax (so these, like REITs, can be appealing choices for retirement accounts — particularly ROTH IRAs, since that income will then either never be taxed or can accumulate tax-deferred for years … MLPs, for a variety of other reasons, are not generally good choices for an IRA if you have a taxable account handy).
There are all kinds of BDCs out there, we’ve had a bit of an explosion in the marketplace for these tax-pass-through investments in recent years, but there aren’t any of them that I’d say are “safer than a CD”. Which one, though, is Perry teasing?
Here are our clues:
“I’ve sent you this special message to tell you about a little-known income investment my readers and I own that pays 11.6% annually — and that is legally required by the government.”
OK, I Can’t let that frequently used bit of tease go by without comment: “Legally required by the government” means they have to pay out dividends if they make money — BDCs are required to distribute at least 90% of their taxable income to investors, so it’s very much subject to their operating performance, they are not “required by the government” to keep paying out a specific dollar figure, or to pay out a rising amount, it’s a function of their income and can go down or be suspended. BDCs in general can, and have, cut their distributions dramatically on occasion when their income dropped.
More from Perry:
“This Is Why the Vanguard Group Owns Over 3 Million Shares…
“…and will be collecting their own $331,909 payday this month, along with us, BlackRock, UBS and the some of the biggest hedge funds and institutional investors on the planet….
“all they are doing — I repeat, all they are doing — is parking their money in this high-yield business development fund, that pays you 11.6%, and laughing all the way to the bank!
“This is why Blackrock’s, State Street’s, and UBS’ profits have been shooting through the roof as income investors have seen their monthly payouts decrease.
“By simply enrolling in this fund, as I’ll show you in your free online report, you’ll finally be able to enjoy the same kind of fat government-mandated payouts that hedge funds and institutional investors have enjoyed for years, and bank an easy 11.6%, too.”
Then Perry explains BDCs a bit:
“Frankly, they use a modified version of the 3-6-3 rule that bankers have been living on for centuries: Pay 3% on deposits. Earn 6% on loans. Be on the golf course by 3 o’clock every afternoon.
“Only BDCs make a whole lot more money on the spread. How?
“By borrowing directly from the government’s own pay window at record low rates while lending the money to cash-starved start-ups that need the money to grow their businesses.
“What’s more, because of the guaranteed nature of these investments, the government not only grants BDCs preferential tax treatment for making these business loans, but also passes the corporate tax benefits directly to investors.
“As if that weren’t exciting enough, BDCs also get to take a management-like stake in the companies they lend money to, to make sure they’ll get paid back.”
And a few more tidbits:
“Northern Trust owns nearly 4 million shares… why BlackRock Fund Advisors owns almost 11 million shares… and many other BIG NAME Wall Street insiders are ALL IN in on this deal.”
Now, don’t take it too seriously when newsletters pitch these stories about institutions owning huge chunks of the shares of their favorite stock. Institutions like these own huge chunks of almost every stock in the market, and often these are simply mutual fund managers who hold a large number of the shares across dozens of funds. There’s no reason to believe that Northern Trust or Vanguard has singled this out as the best income investment available … who knows, those same funds and institutions probably own similar chunks of many of the BDCs.
And then we get one last little hint about our stock of the moment:
“Join me now at Cash Machine and grab my little-known, high-income play now before it goes ex-dividend on November 26, 2013.”
So … 11.6% yield from a BDC, ex-dividend on November 26, and our littany of specific institutional owners and their position sizes … feed all that into the Mighty, Mighty Thinkolator and we learn that this must be… Prospect Capital (PSEC)
Which is not quite the highest-yielding BDC out there … but it’s the highest-yielding of the really big BDCs, this has a market capitalization of over $3 billion and is several times larger than most of the 10%+ yielders. I’m pretty sure that the only two larger BDCs are the better-known Ares Capital (ARCC), which bought the ashes of pioneer Allied Capital, and American Capital (ACAS).
In terms of “safety” PSEC has actually been quite a bit more stable than many of the BDCs over the years — it fell much less than those two more familiar names during the 2008-2009 financial crisis (meaning PSEC dropped only 50% or so — some BDCs fell 90%), and it has a “beta” much closer to the overall market than the average BDC, meaning it moves about as wildly as the S&P, on average.
And it does go ex-dividend for their next monthly distribution on November 26 — though it’s a monthly dividend payer, so don’t get all hot and bothered about buying it in order to get that next dividend, there will be another one, probably the same size, in the following month. The monthly payout is current 11 cents, and the stock has moved 11 cents just today, so it makes sense to take your time and understand the stock rather than rush in to get a dividend check.
Is this BDC any good? Well, they don’t look dramatically overlevered (debt is less than equity), and analysts think they’re not growing — so the consensus seems to be that they’re going to keep churning out the same payment and that yield will be pretty much all you get. BDCs and REITs and all such income-focused investments are quite sensitive to interest rates and to perceptions about future interest rate changes, both because they compete with bonds in investors’ minds and because they’re levered entities who live on the spread between their borrowing cost and their lending income, so you’ll see them react sometimes violently to sentiment shifts among Federal Reserve pundits. For that reason, I’d guess that we’ll probably see dips in price again before too long, as we have over the past year, but I can’t really predict such things.
I don’t know PSEC or any of the other individual BDCs particularly well, other than being quite familiar with their meltdown during the financial crisis, they do offer an investor presentation on their website here if you want to familiarize yourself with the company. And other than that, I’ll leave it in your capable hands — sound like the kind of investment you might like? Have other high-yielders that you prefer? Let us know with a comment below.