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Fears of a renewed spread of the coronavirus and the lack of progress on a second stimulus package have kept a lid on stocks. Value investors are finding few deals worth pursuing while growth investors see no momentum higher.
But the best high-dividend stocks offer a bit of both worlds thanks to their steady income streams and chronic underpricing.
We're specifically targeting a special class of dividend stocks too. These aren't just stocks with high yields; their business models are designed to pay shareholders.
Business development companies lend money to middle market businesses in the United States. In the aftermath of the Great Credit Crisis, many banks stepped back from lending to fast-growing companies or companies looking to expand via acquisition. This opened up a massive market for BDCs to lend money to small to mid-size companies across the United States.
If we dig deep, we can find these firms with solid loan portfolios generating reliable dividend yields. We want to look for those that are already trading at a large discount to the value of the loans they have in the portfolio. That discount should give us some cushion against potential future market or economic disruptions.
Plus, you'll see a pop in share price once these companies are fully valued again.
This Defensive Dividend Stock Yields 12%
Dividend Yield: 12.8%
Crescent Capital BDC Inc. (NYSE: CCAP) was created by a merger between Crescents private BFC and Alcentra Capital that closed back in February. The deal between Alcentra and the BDC managed by one of the leading high-yield investment firms was done with very little fanfare. There do not appear to be any analysts following the BDC right now.
The lack of attention has created a massive discount in Crescent's shares. The stock is currently trading at a discount of almost 30% to the loan portfolio's value.
Crescent's portfolio is invested in 127 portfolio companies with an aggregate fair value of $883.2 million. About 75% of the loans are senior first lien, and almost 96% are floating rate. Eighty-three percent of the portfolio is invested in noncyclical industries. Healthcare and Commercial and Professional Services are the largest sectors in the mix. Investors can buy a highly diversified, defensive loan portfolio at a massive discount right now.
The current yield is 12.8%.
Buy This Dividend-Paying Stock at a Discount
Dividend Yield: 7.7%
Barings Business Development Co. (NYSE: BBDC) is another BDC that appears undervalued to us.
Barings was not created by a merger, but it is participating in one this year. Barings is buying MVC Capital (MVCD) for $177 million in cash and stock. The deal should close in the fourth quarter and will create a BDC with a $1.2 billion portfolio.
Barings has a conservative loan portfolio that is 95% senior first lien loans. The portfolio is incredibly defensive, with high tech, aerospace, and cargo transportation companies among the largest holdings.
Barings is one of the few BDCs that is actively buying back stock in the open market in addition to paying out a dividend.
Speaking of dividends, the yield right now is about 7.7%, and analysts expect that to go higher when the merger closes.
The 20% discount to net asset value is not as high as the discount on Crescent's shares, but it is far higher than it should be for a well-run conservative business development company like Barings BDC.
But our top dividend stock offers the highest yield yet…
The Best High-Yield Dividend Stock to Buy
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.