Sometimes combining two seemingly unrelated facts can help you find the answers you have been seeking. In this case, two facts might be of great use for connoisseurs of dividend stocks:
- Fact No. 1: One of the most difficult challenges facing many investors right now is the search for sustainable income as zero-interest-rate policies persist.
- Fact No. 2: Private equity has been one of the best asset classes in the United Sates for several decades now. For the past 20 years, the Cambridge Associates LLC U.S. Private Equity Index has returned 13.54% annually, compared to just 8.53% for the S&P 500. That is a 30%-plus advantage for private equity funds over the general stock market.
We can combine these two facts to help solve the problems of the income investor.
Many private equity firms offer publicly traded investment vehicles specializing in lending to and investing in the type of middle-market companies that have helped drive such great returns over time. These dividend stocks pay out most of their earnings directly to investors, and the high yields generated by this type of lending can help provide much-needed income in a ZIRP environment.
Here are a couple private equity-powered dividend stocks on my radar right now:
Apollo Investment (AINV)
Apollo Global Management (APO) is one of the world’s largest asset management and private equity firms with more than $100 billion under management. Its largest publicly offered vehicle is Apollo Investment (AINV), a business development company that invests in and ends to middle-market companies and pays out 90% of its net income to shareholders.
As of the end of June of this year, AINV had more than $3 billion invested in 94 different companies. Apollo Investment has had a busy year, as management realigned the portfolio to include more secured debt and opened an office in Houston to explore more investments in the energy space. To protect against higher rates, AINV has positioned about a third of the investment portfolio in floating-rate loans that will increase payout should rates rise.
At current prices, AINV yields 9.55% and would be a good fit for most income portfolios.
KKR Financial Holdings (KFN)
KKR Financial is a subsidiary of Kohlberg Kravis and Roberts (KKR) that invests in high-yield bonds, direct lending, equity investments, oil and gas royalty interests and commercial real estate. KFN also occasionally joins KKR in private equity deals. KKR Financial is structured as a publicly traded partnership and passes most of its income to shareholders.
KFN stock trades right around book value and currently provides a yield of 8.1%, and also would make a solid addition to a diversified income portfolio.
Private equity usually is not thought of in the context of dividend stocks and income investing. However, their experience in leveraged finance makes them a perfect fit for high-yield portfolios.
As of this writing, Tim Melvin was long AINV and KFN.