“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.

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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.


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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.

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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
Member
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 the company….
ALD makes SBA quality loans, and has historically
had a lower loan loss provision than most banks.
Before relying on rumor and inuendo,…If interested, google Allied Capital…
The real problem here, is a clashing of investment
styles…BDC’s aren’t for everyone…These
are held long-term by folks wanting a generous rising dividend, and some growth.
Since 1963, $10,000 (dividends reinvested),
had grown to $11 Million. And yes, I did the math.

ACAS by the told investors the last dividend came in part from retained earnings….
The only stock I ever buy, that I’m not sure what itis, but that pays a 24% dividend…Is a Tanker fleet…Because I know the yield is only a short
term yield that is based upon the average fleet
voyage profitability over a short time period…..

ACAS is also a great, but a different style from
ALD.
Bye the bye…I’m not sure to who’s dedication to
ALD,you refer, SageNot…However, you might check out the author’s credentials before happily
jumping aboard…I think Harvard once studied ALD,
but I can’t see any credible author wasting
time on a smear book about ALD. If so…Then some one has too much time on his hands and needs a job…Or a hobby

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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 underperforming CEO’s & even their ex-Dean admitted that the college needs to add ETHICS cources to their curriculum.

Peace!

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SageNot
Member
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!

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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
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.

Is ALD one of those? Or are any of these BDCs? Maybe, maybe not.

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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
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.)

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destry
Member
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 tanker stock. I know tanker stocks. I also
know to be suspicious of very high dividends that
shouldn’t be.
Switching horses again…
What “book” of mine are you talking about? You were basing your attacks on Allied Capital on a book written by the very person who’s charges and
lawsuits against ALD (All declared False and unsubstantiated by the hearing “District Courts”
;Not me), have coincided with shortsells, by Greenlight, on the stock. Now, I’m not a suspicious person…
But,re-a-lly!!!.
ACTUALLY (Whoops). Actually; It astonishes me that such a “management-goofs” prone company, has been so successful these past “50”years…Everyone must be wrong about ALD…Except David Einhorn.
I’ve been in investments much too long to be blind
to all the pitfalls surrounding companies…
ALD certainly hasn’t done everything right…It is
humanly error prone…As are we all.
The winner is seldom judged by perfection…
The winner is he who makes the fewest mistakes.
(Now let’s see to what planet this one goes)

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