Over the last several months, investors have witnessed some signs of a strengthening economy. The Federal Reserve has been working hard to help bring down inflation, and the capital markets have continued to chug along. The S&P 500 is up about 14% year to date, while the tech-heavy Nasdaq has an overall return of 29%, fueled by significant gains by Big Tech and its cohorts thanks to artificial intelligence (AI) mania.
Yet even with these generous returns, investors could argue that macroeconomic conditions are still very much up in the air. Inflation has cooled significantly from its summer 2022 peak, but at 3.7% in September, it remains higher than the 2% target of the Fed. Moreover, the Fed's series of interest rate hikes has brought borrowing costs up steadily, which has squeezed the spending of corporations and consumers alike. For these reasons, some investors may not want to be exposed to the volatility of certain stocks or industries, and instead would rather seek steady, predictable growth supplemented by the prospect of passive income.
Each of the companies below has a proven track record of reliability, and each pays a dividend. This could be a great opportunity to initiate positions during an otherwise uncertain economic environment.
1. Hercules Capital
Hercules Capital (HTGC 1.31%) is a business development company (BDC) specializing in an investment vehicle called venture debt. Sometimes, start-ups will raise outside funding to help get their operations off the ground. Typically, these investments come from venture capital (VC) or private equity firms that buy stakes in the company. By giving up equity (or shares) in the business, founders and employees become diluted by these outside investors. Typically, start-ups will reach a point where the business is close to generating a profit, and selling more equity to outsiders and experiencing further dilution is unappealing. This is where Hercules, and BDCs in general, specialize.
If a start-up needs outside funding but doesn't want to sell more equity, management may seek a different type of vehicle -- like debt. Hercules is a bit different than a traditional bank because it will generally write larger checks to businesses, but also will lend at higher interest rates. If a company is confident that it can make the principal and interest payments on these high-yield loans, then partnering with Hercules can be an ideal fit given the non-dilutive nature of debt in the capital structure.
What makes BDCs so attractive as investments is that they are required to pay out 90% of their taxable income to shareholders on an annual basis. Hercules is a best-in-breed BDC, and works with notable companies in the technology and life sciences industries. Moreover, the stock at its current price has a dividend yield of about 12%. The chart below illustrates the total return for Hercules stock during the past five years. Investors can see that the continuous reinvestment of dividends coupled with Hercules' strong stock performance has resulted in a surefire multibagger. Even on a year-to-date basis, Hercules stock has a total return of more than 30% -- beating both the S&P 500 and the Nasdaq Composite Index. With shares trading right in the middle of its 52-week range at around $16, Hercules stock looks like a bargain.
Data source: YCharts.
2. Horizon Technology Finance
Horizon Technology Finance (HRZN 0.59%) is one of Hercules' biggest rivals. This BDC specializes in venture debt and typically lends to technology, life sciences, healthcare, and sustainable energy businesses. One of its clients is solar panel company Enphase Energy.
The chart below shows the dividend yield for Horizon Technology Finance during the past five years. Investors can see that its current yield of 10.2% is well below its levels from 2020. However, the stock took a massive hit during that period, which pushed the dividend yield up sharply.
One attribute that makes Horizon Technology Finance an appealing investment is that it pays its dividends on a monthly basis. Moreover, it has a history of paying special dividends; it just announced the next such payout will be a distribution of $0.05 per share to be paid in December.
With the stock trading at roughly $12 per share and yielding more than 10%, now could be a good time to initiate a position.
Data source: YCharts.
Image Source: Getty Images.
3. Trinity Capital
Rounding out this trio of BDCs is Trinity Capital (TRIN 0.34%), which provides venture debt and equipment financing solutions to technology and life sciences companies. Some of Trinity's more recognizable clients are Impossible Foods, metaverse company Matterport, and clothing company Untuckit.
So far in 2023, Trinity stock's total return is an eye-popping 46%. Even better? The total return topped 30% annually during the past three years.
One thing I will point out is the stock has moved quite a bit over the last year. Its 52-week range is as low as $10 and as high as $15. Given that the stock currently trades for more than $14, it's clearly hovering around its high. With that said, at recent share prices, the dividend yield is almost 15%. Moreover, the stock currently trades at a forward price-to-earnings (P/E) multiple of 6.5, lower than Hercules' forward P/E of 7.8. Though the stock trades at the higher end of its 52-week range, I think you will be hard-pressed to find other opportunities trading at discounts to their peers and yielding almost 15%.
Data source: YCharts.
4. Rithm Capital
NYSE: RITM
Key Data Points
Rithm Capital (RITM +1.97%) is a real estate investment trust (REIT). Like BDCs, REITs are required to distribute 90% of their taxable income to shareholders each year. For this reason, they also tend to have high dividend yields. Currently, Rithm's dividend yield is 10.3% and its total return during the past three years is a staggering 71%.
While this is all encouraging, investors should zoom out and consider the real estate industry with some caution. Trends in real estate can be highly sensitive to broader macroeconomic variables. Interest rates and inflation have a direct impact on the ability of individuals or businesses to rent or lease property. With all of that said, as of the time of this writing, Rithm stock is trading 60% below its prior highs on a price-to-earnings basis. And my fellow Fool contributor Keith Speights recently identified Rithm Capital as "dirt cheap." In my view, the historical stock returns combined with a depressed P/E could justify that view. With the stock only trading for about $10, this could be a terrific opportunity to scoop up some shares with a yield of more than 10%.
Data source: YCharts.
