Over the last year, interest rate expectations have gone from expected rate hikes by the Fed to rate cuts, and it’s got people scared and confused. Increasingly confounding to many, rates in many regions around the world are now negative. According to Wikipedia, a Zero Interest Rate Policy (ZIRP) is for extraordinary circumstances. But let’s forget ZIRP for a moment, and instead consider attractive big yield opportunities for income-focused investors. This article focuses on Business Development Companies (BDCs), Closed-End Funds (CEFs) and Real Estate Investment Trusts (REITs). Specifically, we count down our Top 10 Big Yields from those categories. Without further ado, here’s our Top 10.
10. New Residential (NRZ), Yield: 14.2%
New Residential is a big dividend REIT that invests in mortgage-related assets, and the shares have sold off very sharply in recent weeks, mainly because its previously coveted Mortgage Servicing Rights (“MSR”) assets actually decrease in value when interest rates decline.
We have previously written in great detail about New Residential and how it makes money (for example here). However, we’re most recently attracted to the shares because of an attractive high-income generating options trade that exists, and you can read about that opportunity using the link below. But before clicking the link, it is worth noting that based on current market conditions, we currently like selling the October put options with a strike price about 5% - 10% out of the money because it generate very attractive upfront income for us now (that we get to keep no matter what), and they give us the opportunity to pick up shares of NRZ at an even lower price (if they fall below the strike price before expiration), and we’d be happy to own the shares at the lower price because we think the current selloff is overdone and the shares present an attractive investment opportunity. View the details of the trade here…
9. Ares Capital (ARCC), Yield: 8.5%
Ares Capital Corporation, part of the $142 billion Ares Management, L.P. is the largest BDC in the US by assets. The company holds a well-diversified, low risk portfolio of assets and has provided sustained income to investors since its IPO in 2004. We believe the company’s 8.5% dividend yield is reasonable (for example, within the historical range) and the stock presents an attractive risk reward opportunity given ARCC’s stable and consistent income generation. You can read our full ARCC report here….
8. Royce Value Trust (RVT), Yield 8.4%
If you like to generate high income from your investments, this disciplined small cap CEF yields 8.4% and it is currently attractive in multiple ways. For example, its discount to NAV, its well-seasoned management team, its attractive style tilt, its US economy-focus, its impressive long-term track record, its long-term total return potential, and its ability to help you diversify away from the traditional high income sectors (where so many income investors have over concentrated their risks), all while using great discipline to pay you the steady high income payments you need. If you’re managing your own investments, this CEF can be an attractive addition to your diversified, long-term, high-income-focused, investment portfolio.
Also interesting to note, Michael Burry (of “The Big Short” fame) believes there are attractive small cap value opportunities in the market now due to a large cap ETF bubble. According to Bloomberg:
"Now, Burry sees another contrarian opportunity emerging from what he calls the “bubble” in passive investment. As money pours into exchange-traded funds and other index-tracking products that skew toward big companies, Burry says smaller value stocks are being unduly neglected around the world."
You can read our full RVT report here…
7. Main Street Capital (MAIN), Yield 5.6%
If you’re looking for an attractive way to generate stable income and an interesting way to participate in the lower middle-market, then Houston based BDC Main Street Capital (MAIN) is worth considering. It delivers a consistently growing dividend per share, under average debt to equity and above average ROE and ROA, and it has significant oppurtunities for continuied NAV growth per share. You can access our Main Street report here…
6. Saratoga Investments (SAR), Yield 8.7%
Saratoga Investment Corp (SAR) is a diversified, business development company and a CLO manager that has experienced strong portfolio and dividend growth over the last several years. In particular, it manages a growth oriented portfolio and offers an attractive dividend yield. Plus, given the dry powder available to the company as well as potential for additional funding from SBIC program, SAR is well positioned to grow its dividend and earnings while continuing to maintain strong dividend coverage. You can access our full SAR report here…
The Top 5 Big Yield Investments (REITs, BDCs and CEFs) are reserved for members-only, and can be accessed here…
