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2 BDCs Worth Adding to Your Income Portfolio

A long-standing investment vehicle is still going strong

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2 BDC’s For Your Portfolio

My first BDC recommendation for you is Hercules Technology Growth Capital (HTGC). Based in Palo Alto, Calif., Hercules is a leading specialty finance company that provides venture debt and equity to venture capital and private equity-backed technology and life-science companies.

We all want to be on the ground floor of new tech, and HTGC has the due diligence to drill down and discover them for us. We don’t have to pick through all that research if we just invest alongside a BDC that already is doing the research.

Hercules Technology reported its fifth consecutive earnings beat after the closing bell on Feb. 27. The company’s fourth-quarter 2013 distributable net operating income came in at 34 cents per share, outpacing the consensus estimate of 31 cents per share. This also compared favorably with the year-ago figure of 27 cents.

The company’s figures benefited from interest and fee income improvements, in addition to disciplined expense management. Overall, Hercules ended the quarter with an impressive performance, comprising a higher level of liquidity.

For the full-year 2013, HTGC recorded earnings per share of $1.34 versus $1.07 in 2012 and easily beat the consensus yearly estimate of $1.23. For the full year, distributable net operating income came in at $79.0 million, rising 51% from $52.3 million in 2012.

When I first recommended HTGC to my Cash Machine subscribers in May 2011, more than 93% of the company’s debt investments were in a senior secured first-lien position, and more than 88% of the debt investment portfolio was priced at floating-rate interest rates with a LIBOR floor. It was my view that after the bond rally, long-term rates would rise, benefiting HTGC’s interest income. Sure enough, Hercules shares are up more than 50% since then, and that’s not even including the 8% quarterly dividend.

I also believe that this BDC is solidly footed to keep rewarding its investors, so I recommend that you buy HTGC up to $17.

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