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We still don't know what the real impact of the COVID-19 pandemic will be on the U.S. economy. But there are still dividends to be earned out there.
Here you will find two of the best high-yield stocks to buy in September.
The Fed and Congress acted fast earlier this year. People and businesses ended up with the cash in their hands, but needed it to keep their bills paid for the most part.
Many of those benefits programs are coming to an end. Congress will keep doing its typical blame game and finger-pointing. But if they can't get a deal, things could get dicey. The economy is 70% consumer-oriented – consumers could use some cash.
That will be particularly true for business development companies (BDCs). BDCs are middle-market lenders and investors. They deal with companies that are too small for Wall Street but are considered a little too risky for most banks. BDC fills a real void in the financial world and provides much-needed capital for the creation and growth of new companies.
BDCs can be an excellent high-yielding investment. In confusing times like we are experiencing right now, investors have to be much more selective. BDCs that have lent heavily to businesses in industries that could be hurt by the pandemic may perform poorly. Default rates could begin to climb if the economy declines further, leaving investors holding the bag.
We can still find BDCs and high-yielding REITs that will perform very well. But we need to look for these in niches that will do very well, even if it takes a while to get a vaccine and end the pandemic.
Distressed Credit Investor Pays 8.3% Dividend
Oaktree Specialty Lending Corp. (NASDAQ: OCSL) is one BDC that may perform better the more the economy struggles. Oaktree Fund Advisors manage this BDC, LLC, an affiliate of Oaktree Capital Management, L.P.
For those of you not familiar with the firm, it is one of the best distressed and stressed credit investors in the world. Its chair, Howard Marks, has written several outstanding investment books. His regular memos are also considered must-read material by much of Wall Street.
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Oaktree was busy as the economy struggled in the second quarter of the year. The firm originated $260.5 million of new investment commitments and received $127.8 million of proceeds from prepayments, exits, other paydowns, and sales during the quarter. The weighted average yield on new investments was 10.5%. The net asset value of the portfolio rose by 14%, and the board raised the dividend payout by 11%.
At the current price, you are buying the Oaktree portfolio at just $5.01 while collecting an 8.33% dividend.
In addition to the dividend, there is a lot of upside potential for shares of Oaktree Specialty.
The lender should be able to use its skill as a distressed investor to take advantage of any further economic disruption. You could see gains of 20% or more in addition to the dividends you collect in the year ahead.
Invest in Unicorns for a 10% Dividend
Owl Rock Capital Corp. (NASDAQ: ORCC) is a business development company specializing in unicorn lending.
Owl Rock partners with private BDCs to co-invest in loans that are larger than most business development companies can even consider. Owl Rock right now has 102 portfolio companies across 27 industries.
Like Oaktree, it was swamped in the most recent quarter. The BDC made new investment commitments, and funding's totaled $342.7 million and $308 million, respectively, for the quarter. The commitments were distributed across 17 investments in 16 portfolio companies, three of which were new.
Owl Rock likes to be first in line to get paid back if trouble hits. Ninety-seven percent of the portfolio is senior secured loans. That's probably why no Owl Rock BDC has ever had a realized loss.
Management cut their teeth at private equity firms and investment banks and are pretty good at the credit and lending business. Less than 2% of the portfolio was on accrual status despite the pandemic's economic shutdown.
Shares of Owl Rock are $12.26 today. You are paying about $0.85 on the dollar for the Owl Rock unicorn portfolio, and the yield is currently over 10%.
Many business development companies could struggle in the months ahead if the coronavirus continues to spread across the United States.
Focusing on those with a strong niche can allow us to earn high yields, and even as the economy struggles.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.