With the dividend yield of the S&P 500 sitting at a measly 1.9% and U.S. Treasury yields for 10-year bonds sitting fractionally higher at 2.2%, investors seeking dividend yields want higher rates.
But the catch for investing in higher yields can be as Baron Rothschild supposedly said when asked whether to seek an investment with a higher rate of return or a lower — that if you want to dine well go for the first, and if you want to sleep well go with the later.
There are fortunately a collection of well-run companies in varied industries and markets that can provide market-beating yields to feed your appetite for higher dividends while enabling for sound sleep.
Here are five that make the cut.
5 Rock-Solid Dividend Stocks: BlackRock Capital Investment Corp (BKCC)
Dividend Yield: 12.3%
BlackRock Capital Investment Corp (NASDAQ:BKCC) owes its existence and some of its success in providing a 10% dividend yield to a little penmanship from the former president of the U.S. — Jimmy Carter.
Think back to the days of the Carter administration. The U.S. economy wasn’t in the best of shape. Unemployment was running in the 7% range and the GDP had sunk into recession, contracting to a low of -1.6%. Inflation was getting out of hand, with the CPI hitting near 14% at one point.
Arthur Okun, an economist from Yale and the Brookings Institute, figured out just how miserable it was with his Misery Index.
The Misery Index takes the combination of the rate of unemployment and the rate of inflation. The idea is that if prices of goods and services are soaring and fewer folks have jobs, these folks — as well as the still employed — wouldn’t be that enthusiastic on the prospects for the economy. When Gerald Ford was winding up his unelected term, the index was sitting at 12.66% but it got much more miserable with Carter at 1600 Pennsylvania Avenue — 21.98% in June of 1980. The stock market wasn’t helping either, with a loss of 11.5% in 1977.
And then there were the soaring interest rates. Everything from mortgage rates to business loan rates were sky high — if you could even get loans.
Businesses weren’t in any better shape. Back then, the core of the smaller to middle-market businesses and corporations would seek to borrow from commercial banks at a rate called the Prime Rate. The Prime Rate was set by banks theoretically for their best corporate borrowers.
The prime rate hit a peak of 20% during the Carter years. The rationale was twofold. First, inflation was high and some feared it wouldn’t stop climbing. So, for banks to lend, they would have to have some level of protection against further rises in inflation. And second, with the economy in the doldrums, credit risks for business borrowers required higher rates as an incentive to lend.
So, credit markets for businesses were challenging.
This is when a congressman from North Carolina had had enough. On June 12, 1980, Representative and later Senator James Broyhill (R-NC) introduced H.R, 7554, also known as the Small Business Investment Incentive Act of 1980, which Jimmy Carter signed into law on Oct. 21.
The act provided the incentive for investment companies to lend to companies as well as making additional equity investments. The act extended the Investment Company Act of 1940, which allowed investment companies to make and hold investments in companies and other assets in the form of an investment fund with limited corporate taxes.
The result is that companies can set up funds and raise capital and make loans and other investments as a form of a passthrough, with shareholders getting income and gains passed through in the form of tax-advantaged dividends.
This is exactly what BlackRock Capital Investment Corporation continues to capitalize on for its shareholders.
Known as a Business Development Corporation BlackRock is a billion-dollar fund that, so far in its history, has successfully done some $4.5 billion in loans and equity participation investments with 180 companies. BlackRock targets transactions between $10 million and $50 million with a currently portfolio that’s made up of 80% loans and 20% equity participation investments.
The companies span industries from industrials to technology as well as financial and other industries, providing a broad coverage and controlled industry risk for the portfolio.
BlackRock Capital is managed by a team from BlackRock, Inc. (NYSE:BLK) which is the world’s largest asset manager at $5.7 trillion on its books. The scale and capability of the manager gives a competitive advantage in funding costs as well as access to the best prospective investments for the fund.
BKCC shareholders continue to be rewarded with share price gains of some 3.5% year to date. But the real value comes from the large series of dividend distributions which are currently running at 18 cents per share for a current yield of 10%. And with the funds revenues providing a strong level of coverage of the cash dividends the distribution makes for solid income stream for investors.
And with the shares trading at a 13% discount to the underlying book of assets, BlackRock Capital makes for a bargain.
5 Rock-Solid Dividend Stocks: Student Transportation (STB)
Dividend Yield: 7.5%
Student Transportation Inc (NASDAQ:STB) is a company based in the U.S. and Canada. Its business is delivering kids to and from their schools, as well as other activities and charters throughout the year.
This might seem like a small gig, but each day, 500,000 buses transport over 24 million kids to and from their schools in the U.S. That amounts to more than 10 billion trips a year.
Right now some 66% or so of all buses are owned by local districts with the private operators now grabbing 34% of that business.
Districts are finding that it’s cheaper, safer and more efficient to contract out their school bus needs, and the industry has responded. A large and very scattered collection of companies have entered this market, with some 4,000 companies running school buses.
This is where Student Transportation comes in as a market consolidator. The company has 10,000 buses serving over 1 million students. And those numbers are climbing on an ongoing basis including new districts signing on with the company.
The company deploys a strategy that’s as simple as A-B-C — Acquire, Bid and Convert. It acquires the right smaller private bus companies and integrates them into the growing firm
The company bids for contracts to provide transportation services for school districts. This allows districts to reduce costs while also providing a known annual budgetary cost. The company also manages fleets and converts ailing existing local fleets and systems to newer, safer and more efficient bus systems. It also utilizes its fleets for chartered bus transportation — including special trips as well as transporting sports and other school groups around the nation. And it has innovations, including contracting with parents to schedule specific pick-ups and drop-offs.
STB also has an additional profitable business in used bus sales and brokering.
All of this continues to bring in that larger and rising amount of cash that’s been fueling the dividends of the company.
The dividend is declared quarterly and paid monthly and at a current yield of 7.5% that’s paid from the steadily rising revenue stream from its operation which over the past five years has continued to climb at an average annual rate of over 14% per year.
5 Rock-Solid Dividend Stocks: Hercules Capital (HTGC)
Dividend Yield: 10%
Do you want to be the guy who bought into the latest tech billionaires when they were only guys and gals in hoodies working in their parents’ garages? Then Hercules Capital Inc (NYSE:HTGC) is the company to own.
The company is structured as an investment fund, which gives it the advantage of limiting corporate taxes while maximizing dividend payments to its shareholders. It operates much like a merchant bank. This means that it primarily makes loans and funds debt of private companies while also taking equity stakes that provide capital appreciation as the companies sell stock to the public or private markets.
It is based in the tech Mecca of Palo Alto, so Hercules gets to know everyone in the neighborhood that is noodling the next great idea in everything from gadgets to internet to food and life sciences.
It has a great track record of funding folks that gave us companies like Facebook Inc (NASDAQ:FB), Box Inc (NYSE:BOX), Sling Media (think Slingbox) as well as the transformative real estate company Trulia Inc (NYSE:TRLA) and even the organic food company Annie’s Inc (NYSE:BNNY) all before millions of future customers knew that they were essential.
And it attracts the heavies of the private equity and investment banking worlds including Bain & Company, BlackRock, Inc. (NYSE:BLK) as well as Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) — all of which participate with Hercules on its many deals.
It would be one thing if Hercules was simply placing educated bets with investor monies on the next new thing, but instead, the company has a history of working with its investments to further develop their companies’ products and services, including guidance on going to the capital markets and share sales.
It continues to build its portfolio of debt and equity participation assets, which continue to increase income, up over 11% year over year with an average portfolio yield sitting at over 14%.
The dividend is well supported and has been paid every single successive quarter since Hercules went public. Currently yielding 10% Hercules is a great way to harness a high level of current income while also participating in some 213 loan and equity participation deals in the heart of the technology market.
5 Rock-Solid Dividend Stocks: Compass Diversified (CODI)
Dividend Yield: 8.7%
Compass Diversified Holdings (NYSE:CODI) is a company that Warren Buffett would love to own — it would bring him back to the roots of his success.
Back in the later 1950’s, Buffett had formed a series of investment partnerships that he and a small collection of individual investors would invest in — buying and owning companies that were in basic industries that were trading at a discount to their valuation while also generating a strong level of cashflow.
These would become the basis of Berkshire Hathaway Inc. (NYSE:BRK.B). And while he is widely revered as one of the most astute investors today, it was in his early years of buying smaller textile companies, map makers and other companies that really made his reputation and the base of his fortune.
There’s no time machine that we can take us back to the start of Buffett’s ascent, but there is a contemporary alternative in Compass Diversified.
Compass is set up under the 1940 Investment Company Act as a fund that owns or controls a select collection of private companies that are solid and maybe a bit boring, but also profitable, and generating the cashflow that feeds the dividend — currently yielding 8.4%.
And because of the structure as a fund, there is no double taxation of dividend income, as the company is another form of a passthrough security with limited corporate taxation. This also means that a portion of dividends paid to shareholders is shielded, making that 8.4% yield worth even more.
The companies include industrial and consumer products with strong and steady customer bases. They include Liberty Safe — a gun safe manufacturer. And it has ErgoBaby — a well-sought-after baby carrier branded company. It has hemp-based food company Manitoba Harvest, the Sterno heating company and more.
All together, the holdings of these companies continue to generate ample and rising revenues to support that dividend. Revenue gains for 2016 amounted to 21.5% and as of the most recent filings the holdings are set to advance revenues by some 22.1%.
Warren Buffett would be envious of the great mix of companies rolled up in Compass.
5 Rock-Solid Dividend Stocks: MFA Financial (MFA)
Dividend Yield: 11.5%
MFA Financial Inc (NYSE:MFA) is a mortgage investment company that since 2000 has generated an average annual return to shareholders of over 15%. Think about that for a moment. Through all of the rising and falling interest rates and mortgage and home market booms and busts, MFA has not only been a survivor, but a profitable one.
That’s the start of a compelling reason to own this high-paying real estate investment trust (REIT).
The key to MFA is that it has maintained an expanding portfolio of mortgage securities with a strong eye on controlling risks.
Right now, the primary risk in income investing is the prospect of rising interest rates, which can drag down existing securities. But MFA’s portfolio is insensitive to rising interest rates. It does this by investing in shorter-maturity securities that have a low sensitivity to rising rates. And it also invests in securities that step up in yield as interest rates rise.
It also has a proven track record of engaging in specific hedges that provide offsetting gains if the mortgage market heads lower. Overall, the sensitivity on its entire portfolio is running at a duration of 0.76%. This basically means that for each 1% of interest rate hikes the portfolio would only face a potential loss of 0.76% if it did nothing to counter shifting market conditions.
And it also maintains a strong hold on the quality of its mortgage securities. The majority of its primary assets are purchased or owned at discounts to the underlying values of the property collateral. This results in a loan to value (LTV) rate of its primary assets at discounts of 20% or more, with the lion’s share sitting at even greater discounts. This means that losses with defaults are highly minimalized, with most borrowers having lots of equity in their properties.
Moreover, with the U.S. mortgage market continuing to improve, overall market delinquencies continue to fall, making the overall market less risk-prone.
MFA manages its portfolio not just with hedges, but also with its credit facilities. This means that it borrows at lower rates to help fund the mortgage securities it holds. This increases the net yield for investors.
The dividend is paid quarterly at a current rate of 20 cents for a yield of 9.1%. And since it is a REIT, it passes the majority of earnings on to stockholders.
With a long history of positive performance and a great yield, MFA makes for a rock-solid dividend stock.
[Ed’s note: This article was previously published Sept. 20, 2017. We are republishing it to reflect the changing yields.]
As of this writing, Neil George did not hold a position in any of the aforementioned securities.