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