Rare Securities that Pay Hefty Yields

By Carla Pasternak


Low Yields in the S&P 500

Venture Capital 2.0

Business Development Companies


--- Advertisement ---

Are You New to Investing?

Get started with Cabot Stock of the Month! Diversify your portfolio and profit while learning to invest using various investment strategies. It's designed so that subscribers-of all experience levels-get a taste of a multitude of investing styles. And the price is so low, you'll recover it from your very first profitable investment. Get started today!


I've mentioned before that I often go off the beaten path to find the best income investments in my Street Authority newsletters High-Yield Investing and High-Yield International. These days you have to-remember that the common stocks in the S&P 500 yield only 2% on average.

Luckily, there is an entire world of securities created with income investors in mind. You just have to know where to look.

Case in point: I've been tracking a rare breed of company-there are only about three dozen of them on the market. But these rare securities pay hefty yields, with a few exceeding 12%.

These companies are the 21st century version of venture capital funds. You've heard of venture capital-it generated a lot of press (and billions of dollars) during the tech bubble. These companies invested in start-ups like Google and Amazon, and made millionaires out of many of their investors.

But the venture capital world has historically been closed to all but the very wealthy. And it certainly hasn't thrown off high yields for average investors. That's until this new kind of income investment came to light. Now investors can invest just like venture capitalists-putting money into small companies off-limits to most-while being paid double-digit yields. And they can do it by easily buying and selling shares on the NYSE.

This comes thanks to business development companies-or BDCs for short-which make loans to small companies, often taking an equity stake as well. Most importantly, BDCs pass along the income earned from these investments, allowing them to pay great yields for aggressive investors-many currently yield 8%-11% and a few are yielding 12% or more.

Yields are powered by the high-interest loans BDCs offer the companies they invest in. But yields are also given a boost because BDCs enjoy a tax-advantaged status. They pay nothing in income taxes as long as they distribute at least 90% of taxable income to investors. Dividends are paid at least quarterly and some even pay monthly.

--- Street Authority Advertisement ---

Put Yourself in the "0%" Tax Bracket Before December 31

In a few months you could pay as much as 43.4% in taxes. But no matter how much money you make, shares of this little-known investment instantly move you into the "0%" tax bracket that Uncle Sam can't touch. As a bonus, this investment could soon pay the "taxable-equivalent" of an 11.8% yield.

Get the details here.


But business development companies have been around for a while now, so why am I bringing them up?

To complement their high yields, BDCs look to be in a "sweet spot."

Right now, conventional lenders have tightened up lending, leaving many companies with few options to fund growth. BDCs are one of the few sources of financing available for these businesses; a captive market is good for business.

But as I said above, these yields are for aggressive investors as investing in small companies (especially in a soft economy) can be risky. During the height of the recession, several BDCs were forced to cut distributions to investors.

To offset their investment risk, BDCs don't invest in just any company-the best BDCs use their expertise to be highly selective. They find undervalued businesses with strong potential and guide their growth by taking seats on their boards and providing consulting advice.

These BDCs also manage risk by holding the bulk of their assets in debt securities. That way, if a company it invests in goes south, the BDC stands a better chance of being paid for its investment compared to an equity stake. BDCs further diversify their risk by owning stakes in many companies at once. The typical BDC spreads the risk across 50 or more different companies and 20 different industries.

With their diversified portfolios (and currently low borrowing rates), I expect select BDCs to continue to be a solid-albeit still volatile-place to earn a strong yield ... if the economy can at least tread water.

Good Investing!

Carla Pasternak
Dividend Opportunities

P.S. I recently selected one particular business development company as my August "High-Yield Security of the Month" in High-Yield Investing. This pick delivers a 12% yield and has gained roughly 30% so far this year. Learn more about this idea here.

Headline News

Stock Picks


Shopify (SHOP), which came public in May of last year, is a new leader.


Roy Ward uses the PEG ratio to determine if the stock is undervalued or overvalued.


For AMZN to be undervalued, the stock would need to fall to 393. 50.

Cabot Wealth Advisory

The Emerging Market Stock You Ought to Own

By Paul Goodwin on September 27, 2016

The company I’m talking about (the one that you probably don’t own) is the largest Chinese instant messaging company. It is a giant in its own right, with a market cap of $262 billion and annual sales of over $19 billion. The company grew revenue by 28% in 2015 and routinely boasts after-tax profit margins over 30%.Read More >

Tesla Model 3 vs. Chevy Bolt: Which Affordable Electric Car Is Better?

By Timothy Lutts on September 26, 2016

The Tesla Model 3 and Chevy Bolt are the first two affordable electric cars with a driving range of more than 200 miles. Let’s see how they stack up - and what they could mean to Tesla Motors (TSLA) and General Motors (GM) stock. Read More >

Does Alibaba (BABA) Stock Measure Up to Amazon (AMZN)?

By Paul Goodwin on September 23, 2016

Alibaba (BABA) is the Amazon (AMZN) of China. But does BABA stock measure up to AMZN stock? Let’s break it down!Read More >