Business Development Companies: Big Dividends, Differentiated Risks

Tsakos Call Option Update:

Our Tsakos call options have been very successful, so far.  We paid $0.86 per call back on February 9th, and they’re now trading at $1.70 per call, for a 97.7% return.  The actual stock still trades at only $6.45 per share which is well below the book value of its assets alone (and it doesn’t even take into consideration the strong future earnings power of the company).  We continue to hold these calls because we believe they have significant upside potential between now and their June 2016 expiration (we hold the June calls with a $5.00 strike price).  You can read more on our Tsakos views here.


Very High Dividend BDC's:

We’ve been spending some time researching Business Development Companies (BDCs) because they offer extremely high dividend yields as you can see in the following table:


For those of you who don’t know:

A Business Development Company ("BDC") is a form of unregistered closed-end investment company in the United States that invests in small and mid-sized businesses.  BDCs are similar to venture capital (VC) or private equity (PE) funds since they provide investors with a way to invest in small companies and participate in the sale of those investments. However, VC and PE funds are often closed to all but wealthy investors. BDCs, on the other hand, allow anyone who purchases a share to participate in the open market.

The total returns (dividends plus price appreciation) of many BDC’s have underperformed the total return of the overall market (e.g. S&P 500) over the last five years (as the above table shows).  However, if you really love and need the steady high dividend payments then BDCs may still be an excellent investment for you.

We expect our upcoming Blue Harbinger “Stock of the Week” will focus on one of the BDC’s in the above table.  Stay tuned because there are some attractive opportunities in this space, especially considering many of them are trading at a significant discount to their net asset values.


Don't Sell Out of Fear:

Not surprisingly, the Dow Jones Industrials Average is now slightly positive for the year after being down significantly earlier this year.  This is yet another great example of why it pays to be a “long-term” investor.  While many investors sold their investments earlier this year (out of fear) and then missed the subsequent rebound, smart long-term investors stayed put and are now positive for the year. 

Our Blue Harbinger Income Equity strategy is somewhat similar to the Dow Jones because it owns blue chip companies with attractive dividends.  Since its inception in January, the strategy continues to outperform both the S&P 500 and the Dow Jones.  Two stocks in particular (Caterpillar and Union Pacific) are great examples of smart long-term investing because as many investors sold these stocks out of fear earlier this year, they have now rebounded very, very, strongly and they are up big!  For example, Caterpillar is up over 11% this year and Union Pacific is up 8%.


Value Investing:

There’s been much talk about how “value” stocks have been underperforming “growth“ stocks for many years now, and many people believe value stocks are due for some outperformance.  For example, a recent Barron’s argues “Move over Facebook and Netflix, Value Investing is Rebounding,” and the CFA institute wrote a good blog post on the subject in December titled “Value Where Art Thou."

For reference, small cap VALUE stocks (represented by the Russell 2000 Value Index) are now up +1.3% this year while the straight small cap index (Russell 2000) is down -2.7%.  Similarly, large cap VALUE stocks (as represented by the Russell 1000 Value Index) are up +2.3% this year while the straight large cap index (Russell 1000 Index) are up only 2.0%.

We are currently overweight value stocks (via our ETF ownership) in all three of our Blue Harbinger strategies: Disciplined Growth, Income Equity, and Smart Beta.  And we believe value stocks will continue to outperform not only because they’re “value” stocks (i.e. they’re cheap and on sale), but they’ll also continue to outperform because they’ve been overly beat up as investors have chased growth in recent years (i.e. we’re due for some “reversion towards the mean”).

And remember, “value versus growth” investing is only one way to invest that we are utilizing via our ownership of some value ETFs.  However, we also believe there is always great opportunity for good stock pickers which is a big part of what we’ve been doing (successfully) in our Disciplined Growth and Income Equity strategies.


Be Consistently Not Stupid:

Lastly, it’s important to avoid making stupid decisions as an investor.  For example, it would have been stupid for long-term investors to have sold everything when the market declined earlier this year instead of continuing to own for the long-term.  In conclusion, here is a great quote from great value investor Charlie Munger:

It’s remarkable how much long-term advantage [we’ve] gotten by trying to be consistently not stupid.