Let’s start today’s article with a confession: Closed-end funds (CEFs) are my passion, but they aren’t only Dividends of 8% or more (often paid monthly).
The main reason I’ve invested in these great high-yield vehicles over the years is actually very personal. Over a decade ago, the high yields of CEFs provided enough passive income to quit my job.
I was a professor at the time, but decided to quit to live off my income.As I began to preach his CEF gospel, more people heard the call and my CEF Insider Launched in the spring of 2017, the advisory was born.
However, I will also admit that I have tried other great yield options and they all fell short. Take exchange traded notes (ETNs), which have come and gone over the years. These are empty assets that don’t actually own anything, which is why we warned our readers to avoid them seven years ago.
I also tried a master limited partnership (MLP), but quickly discovered the tax reporting nightmare that comes with it. (MLPs issue K-1 packages to report income, which is a headache compared to the 1099 forms you receive from stocks).
Similarly, Royalty Trust went bankrupt. In July 2022, I warned about these and pointed out the potential for catastrophe. BP Prudhoe Bay Royalty Trust (BPT). His BPT efforts since then include:
BPT loses most of its value
Another confession: This is a relatively easy call, as commodity stocks generally had returns near the bottom of the asset class over the six-year period ending in 2021 and 2022, and then soared 38.5% and 22%, respectively, in the same years. was. That was too much so I set a fix.
The truth is, oil pipelines are hard to make money for anyone other than the people working on the pipelines. That said, both royalty trusts and MLPs focused on energy discovery and transportation are often poor investments over the long term (though they can potentially be profitable if invested at the right time). ).
BDC wins silver — but be careful
That led me to another high-yield asset class (other than CEFs) called business development companies (BDCs) that I continue to be interested in.
One thing to note here is that BDCs have even lower quality assets (loans in this case) than CEFs and other income strategies. deadly. This is because it is a complex area of the market where poor quality investments can be hit particularly hard.
Simply put, a BDC collects investor capital and lends it to primarily mid-sized companies in the private credit market (these companies borrow from the BDC rather than banks). The BDC then sends the interest on those loans back to the investors.
Some BDCs are good and have been around for a long time.consider Main Street Capital Corporation (MAIN)for example:
MAIN achieves triple-digit profits on strong dividends (and profits)
As seen above, MAIN is a BDC success story, posting a relatively stable 206% total return over 10 years thanks to its prudent lending practices. Dividends (current yield: 6.1%) have also grown steadily over the years with some special dividends (spikes in the chart below).
MAIN increases dividend and also implements special dividend
This is a strange graph, and part of it is due to the pandemic. MAIN suspended special dividends during those dark hours. When it restarted in 2022, that amount was smaller than BDC’s regular dividend (unlike the huge special dividend that gave MAIN an annualized yield of over 8% for most of the late 2010s). This is the reason for the downward spike seen above.
However, these larger dividends have recently been reinstated, which could push MAIN into high-yield territory for a long time to come.
As such, one of the best BDCs, MAIN, presents higher risks than you would expect for a mid-sized company. In times of economic stress, mid-sized companies are often hit harder than normal, so loans to these companies have lower yields. something bigger.
Another complicating issue for BDCs is credit quality. Consider this graph for another BDC. TriplePoint Venture Growth BDC Corp (TPVG).
TPVG sliding price
TPVG consistently pays high income streams, and today’s yield is off the charts: 17.3%. However, the stock price has been consistently declining since the second half of 2021 and will not recover. what’s happening?
TPVG’s net asset value (NAV, or the value of the loans it holds) has fallen significantly, currently at around $9.21 per share, down from $14.01 at the end of 2021.
The reason is simple. TPVG was forced to downgrade many loans as mid-sized companies struggled. The focus on high-tech didn’t help, as rising interest rates hit many small tech companies hard. There are also more downgrades across BDCs.
Additionally, companies that borrow money from BDCs are pledging their own assets as collateral, which are often difficult to value given that these are private companies. In some cases, lenders may hire private investigators to determine the value of the property they are borrowing from.
Of course, that increases the risk. And that’s why these companies only target companies that can handle that kind of risk, since a poorly managed BDC can have a significant impact on the bottom line. Consider the stall observed in TPVG compared to MAIN.
TPVG slows down
TPVG was performing well in MAIN before the pandemic and rode the post-pandemic recovery, but a challenging portfolio prevented it from taking the recovery to new heights. If uncertainty about portfolio quality continues, more BDCs could follow TPVG’s lead and make sudden and rapid changes in direction.
A final word about BDC? You can earn a lot of good money here if you can find the good ones and avoid the bad ones. However, doing this requires much more effort and expertise than analyzing investments such as stocks, ETFs, and CEFs.
These “AI-powered” 7.8% dividends will crush BDCs (and regular stocks too)
As I said earlier, I make out Use BDC. But given the risks and how difficult it is to value a portfolio, I would recommend them now, especially when he has a lot of stable, bargain-priced 8%+ dividends waiting in CEFs. I don’t care.
One of the benefits of a CEF is that it allows you to target your investments to specific sectors in a different way than a BDC.
Want to target large-cap stocks? There’s a CEF for that.
Healthcare stocks? There’s also his CEF for that.
Artificial intelligence stocks? Well, there’s also his CEF for that. In fact, I wrote a feature on the top four CEFs to take advantage of the burgeoning AI megatrend. An “AI-powered” portfolio that currently pays a hefty 7.8%.
This unique CEF “mini portfolio” only All four of these funds trade at deep discounts to their net asset values (NAVs), so you can still buy AI stocks cheaply.
But I don’t expect this to continue, as AI continues to dramatically increase U.S. productivity and investors who “missed the boat” are desperately looking for a way out.
We will arrive much earlier than them!
Click here to learn more about four “AI-powered” funds with a 7.8% yield (and a deep discount) and get a free special report with each named.
See also:
• Warren Buffett’s Dividend Stocks
• Dividend Growth Stocks: 25 Nobles
• Future Dividend Aristocrats: Strong Candidates
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
