As interest rates continue to scrape the bottom of the barrel, investors have become more interested in companies that provide a nice dividend in addition to being a solid investment.
Not surprisingly, businesses such as real estate investment trusts and business development companies have been garnering more investor attention lately. Because of their corporate tax structure, both of these entities are required to disperse 90% of their profits to stockholders. In the case of BDC Solar Capital (Nasdaq: SLRC), this can translate into a dividend yield of nearly 11%.
A growing concern
Like other BDCs, Solar Capital is a closed-end investment company that provides debt and equity investments in leveraged, middle-market companies. Since BDCs are basically private-equity companies that are publicly traded, they can provide investors access, through the BDC's investments, to both public and privately held businesses. In Solar Capital's case, the companies in which it provides investment capital are all based in the U.S., giving the investment a home-grown flavor. This should turn out to be a good thing, since foreign investments are taking a beating right now from the litany of economic woes from across the pond.
Solar Capital is a relatively new company, having gone public a little over two years ago. The company has increased its investment by 19% year over year, and saw revenue growth in 2011 of 11%. That translated to an earnings growth rate of 6.5%, a spurt that is expected to continue at close to that rate right through the end of next year. It's always nice to know that insiders have faith in the company, too -- both the company president and the CFO have recently purchased stock valued at more than $400,000.
Other BDCs worth considering
Solar Capital's president and CEO, Michael Gross, founded Apollo Investment (Nasdaq: AINV) before his tenure at Solar. This well-known BDC makes investments in various sectors such as health care, technology, and, more recently, energy. Apollo just closed a five-year, $100 million credit facility with Miller Energy Resources, a company that's looking to develop oil fields in Alaska. Apollo's yield is more than 10%, and it's currently trading below book value per share. The insider trading activity here has been notable, with insiders purchasing a total of 50,000 shares in little more than a month.
Ares Capital (Nasdaq: ARCC) recently expanded its revolving fund facility to $580 million from $500 million, with plans to increase the fund up to $865 million. The company recently announced a dividend representing a 9.5% yield, and company President Michael J. Arougheti has shown his belief in Ares' future by purchasing more than $1.5 million worth of shares several weeks ago. In the thumbs-up department, the Motley Fool's own CAPS community also expressed faith in the company, as fellow Fool Brian D. Pacampara recently reported.
PennantPark Investment (Nasdaq: PNNT) also showcased its 11% yield recently, and this company has shown a predisposition toward increasing payouts over the past five years.
On the other hand, American Capital (Nasdaq: ACAS) has been struggling to recover from its losses incurred during the financial meltdown. It suspended dividends about one year ago and has been derided by some analysts for engaging in stock buybacks that have had no positive value for the company. However, as with its most recent buyback, American has been steadfastly plumping up its net asset value. Despite the lack of dividends, investors have been bidding the stock up -- nearly doubling its value from one year ago, though it is still trading below book value. Fitch Ratings has also expressed some goodwill toward the company, having recently raised its rating outlook to "Positive" from "Stable."
An investment sector worth watching
Solar Capital looks particularly well positioned for growth, as its domestic portfolio will protect it from losses from foreign investment, especially Europe. The company should be ahead of its peers when the U.S. economy really gets rolling as well.
As for American Capital, I would engage in watchful waiting to see how their plan works out. Although it is trading below book value, it doesn't seem awfully appealing without that nice dividend. On the other hand, it seems clear that the company will not pay out again until the ratio is closer to 1, so investors will have to keep both eyes trained on American if they are looking for an auspicious time to buy into this BDC.
Considering the dearth of high-yield investments these days, BDCs are an attractive idea for investors interested in maintaining a decent income stream. The combination of sizeable yields and the ability to experience a taste of private equity investing should contain enough mystery and allure to add to these companies' growing popularity for some time.
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