The stock markets got off to a brilliant start in 2024. Both those S&P 500 And Nasdaq Composite have reached record levels, largely thanks to major technology companies leading the way in artificial intelligence (AI).
AI certainly represents an attractive growth market at the moment. However, investors can also supplement their portfolio with other options. Dividend stocks are a reliable source of growth.
Business Development Companies (BDCs), in particular, are a unique source of passive income because they are required to pay 90% of their taxable income to investors each year. Let’s break down three leading BDCs that could add further gains to your portfolio.
1. Hercules Capital: 10.4% dividend yield
Hercules capital (NYSE:HTGC) is a leading BDC for technology, life sciences and sustainable energy companies. It specializes in an investment vehicle called venture debt.
Generally, in the early stages of building a start-up, a company needs to raise funds from venture capital or private equity firms. However, as the company matures, raising additional equity becomes less optimal for founders due to the dilution that occurs.
Here Hercules stands out. Debt does not have a dilutive effect – i.e. it does not reduce the equity investments of founders and employees. Additionally, Hercules typically issues larger checks compared to a typical bank.
The catch is that to account for this risk, the interest rates on Hercules’ term loans are much higher. In addition, the BDC generally includes warrants in its operations that can be converted into equity – giving it additional incentive if one of its borrowers is acquired or conducts an initial public offering (IPO).
Over the last 10 years, Hercules shares have delivered a total return of 270%. This not only highlights the company’s excellent investment prospects, but also highlights the importance of reinvesting dividends.
Given Hercules’ juicy 10.4% dividend yield, now seems like an incredible opportunity to acquire shares in this leading BDC.
2. Horizon Technology Finance Corporation: 11.7% dividend yield
Horizon Technology (NASDAQ:HRZN) is a major competitor to Hercules. The company also specializes in providing high-interest loans to venture capital-backed startups in the technology, energy and healthcare sectors. While its total return of 147% over the last decade doesn’t rival that of Hercules, I’d say it’s not too bad.
Additionally, Horizon’s price-to-book ratio (P/E) is significantly lower than Hercules’ P/E at around 1.2. Each company is a leading BDC among startups, but the disparity in valuation multiples depicted above may suggest that Horizon currently represents a better value.
With an impressive return of 11.7%, Horizon is hard to beat. This could be a good opportunity right now to add other dividend investments to your portfolio.
3. Ares Capital: 9.4% dividend yield
The last BDC on my list is Ares Capital (NASDAQ:ARCC). Ares is actually quite different from Hercules and Horizon.
The company typically focuses on lower middle market companies across a wide range of industries. Essentially, Ares has created a unique little niche in the BDC space. The company works with companies that may be considered too risky or not attractive enough to work with a traditional investment bank.
However, Ares’s extensive balance sheet and astute approach to due diligence gives the company a high degree of financial flexibility. Therefore, compared to other BDCs, Ares can offer a range of more sophisticated financial solutions, including leveraged buyouts (LBO).
One of the most attractive aspects of Ares is that it has consistently outperformed some of the leading exchange-traded funds (ETFs) in recent years. As seen above, investing in Ares has crushed S&P 500-focused ETFs like the SPDR S&P 500 ETF Trust, Invesco S&P 500 Equal Weight ETFAnd Vanguard S&P 500 ETF.
Ares has a rewarding track record and offers a business model that is different from other BDCs. Therefore, now could be a great opportunity to buy stocks that yield more than 9%.
Should you invest $1,000 in Hercules Capital now?
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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
“Here are my top 3 ultra-high dividend yield stocks to buy in April” was originally published by The Motley Fool