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Stocks just do not seem to have an off switch as we approach the end of the year.
The anticipation of a vaccine is continuing to give investors the confidence to pour money into stocks.
Bonds have drifted back a little, but not enough for yields to be meaningful enough.
This particular combination can make life difficult for income-seeking investors. The pool of high dividend stocks has been shrinking, and traditional fixed-income investments have paltry yields at best.
Investors with new money to put to work in income-producing ideas face a real dilemma right now.
Fortunately, there are alternatives to traditional stocks and bonds that can provide the high yields needed to fulfill your income needs...
Here's what I mean, including the best dividend stocks to buy now...
A New Way to Generate Yield
Business development companies (BDCs) are investment funds that lend money to customers that need to borrow money outside the banking system.
In the aftermath of the credit crisis back in 2009, most banks withdrew from lending to smaller companies or lending money for takeover or business expansion plans for all but the most prominent companies.
This created an opportunity for non-bank lenders like business development companies to fill the void and lend to these small- and mid-sized companies.
While the loans were riskier than bank loans, they paid much higher interest rates that more than compensated for the extra risks involved.
Business development companies are one of the few places investors can consistently get above-average yields in today's market.
One of the keys to success in BDC investing is to look for BDCs that trade for less than the value of the loans they own and that insiders are buying in recent weeks. The officers and directors of a BDC know more about the quality of their portfolio...
If they spend cash to buy more shares of the fund they manage, it is a huge statement that they expect huge returns over the next few years.
The Best Dividend Stock Yields 13% Now
A director at both FK KKR Capital Corp. (NYSE: FSK) and FS KKR Capital Corp. II (NYSE: FSKR) - two BDCs specializing in income generation for its clients - just purchased its own shares. It was the first insider buys for both BDCs in several months.
And I think we will see more.
The two BDCs are merging to create a single fund that has over $14 billion in assets. The increased scale will give the new giant BDC access to capital markets on more favorable terms and save on costs. The new fund will also lower the fees to investors by a significant amount.
Management has indicated the new dividend yield will be 9.5% on the new BDC's net asset value. Based on the projected NAV of $24.46 when the merger closes, that will be an annual payout of $2.32.
Both FS KKR Capital and FS KKR Capital II trade at a discount to NAV of about 25%. If the new BDC trades on similar levels, the yield will be over 13%.
The BDC is comanaged by two of the best firms in their respective industries. FS Capital is a leading investment firm that specialized in alternative investments such as REITs, closed-end funds, and of course, business development companies.
KKR is one of the oldest, largest, and most successful private equity firms in the world. Its managers know credit markets form both ends of the spectrum as they have both borrowed and lent out hundreds of billions of dollars over the years.
Both BDCs currently trade at a considerable discount to their net asset value.
If by some miracle, the firm's post-merger value was at or near NAV, investors who buy either FS KKR or FS KKR II now will have a quick gain of almost 40% and own shares of a high-quality BDC paying 9.5%.
If the new BDC trades near the current discount levels, then pre-merger buyers of either BDC will find themselves owning a BDC with over $3 billion of liquidity, a lower cost structure, and less leverage than most of their competitors at a huge discount to NAV.
The combined portfolio will have loans to 216 companies across a wide swath of industries. More than 70% of the portfolio will be senior secured loans.
The combined BDC's portfolio will have a loan delinquency rate of just 3.6%.
The dividend yield will be around 13% annually.
Buying either BDC today should have a favorable result for income-seeking investors. The merger creates an opportunity to buy into what will be one of the largest business development companies in the United States at a discounted price.
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