It's not easy to find income in the markets these days. Treasuries yield less than 5%, which doesn't leave much left over after taxes and inflation. The stock market's average dividend yield is less than 2%. Even real estate investment trusts, a favored high-income vehicle to park in retirement accounts, pay out only 3.5%, after the enormous run-up in REIT stock prices over the past seven years.
Bryan Perry makes a living by searching in the nooks and crannies of the markets for stocks that make generous annual payouts, increase their dividends each year and carry relatively low risk. If you can find companies that make distributions that beat inflation and return much more than bonds, he reasons, you'll probably also benefit from stock price appreciation. Perry applies these principles in a newsletter he edits, The 25% Cash Machine, and in a book of the same name he published this year with John Wile & ySons. He also manages money for clients in need of high annual investment income.
One of Perry's favorite sectors is business development companies. These are publicly traded investment companies that extend loans or invest in small and midsize private enterprises. A typical lending rate is 12% to 13%, and there could be hundreds of corporate customers in a BDC portfolio. BDCs, like REITs, are required to pay out at least 90% of their ordinary taxable income to shareholders, which accounts for their lush dividends.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Perry currently recommends four BDCs. American Capital Strategies (symbol ACAS), the industry leader, yields 7.8% and closed April 13 at $45.92. This stock has returned a staggering 24% annualized since its listing in 1997. Ares Capital (ARCC) and Apollo Investment Corp. (AINV) are both much younger companies that grew out of venerable private equity funds. Ares closed at $18.32 and yields 9%; Apollo closed at $21.37 and yields 9.4%. With borrowers coming from many industries, all three of these are broadly diversified. Perry's fourth pick, Prospect Energy Corp. (PSEC) focuses on the energy sector. It closed at $17.56 and yields 8.6%.
As with REITs, tax-deferred accounts make the best home for BDCs.
-
What Is a Qualified Charitable Distribution (QCD)?Tax Breaks A QCD can lower your tax bill while meeting your charitable giving goals in retirement. Here’s how.
-
Embracing Generative AI for Financial SuccessGenerative AI has the potential to reshape how we approach learning about and managing our personal finances.
-
Fed Sees Fewer Rate Cuts in 2025: What the Experts Are SayingFederal Reserve The Federal Reserve cut interest rates as expected, but the future path of borrowing costs became more opaque.
-
Why Is Warren Buffett Selling So Much Stock?Berkshire Hathaway is dumping equities, hoarding cash and making market participants nervous.
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
-
If You'd Put $1,000 Into Google Stock 20 Years Ago, Here's What You'd Have TodayGoogle parent Alphabet has been a market-beating machine for ages.
-
Fed Goes Big With First Rate Cut: What the Experts Are Saying
Federal Reserve A slowing labor market prompted the Fed to start with a jumbo-sized reduction to borrowing costs.
-
Stock Market Today: Stocks Retreat Ahead of Nvidia EarningsMarkets lost ground on light volume Wednesday as traders keyed on AI bellwether Nvidia earnings after the close.
-
Stock Market Today: Stocks Edge Higher With Nvidia Earnings in FocusNvidia stock gained ground ahead of tomorrow's after-the-close earnings event, while Super Micro Computer got hit by a short seller report.
-
Stock Market Today: Dow Hits New Record Closing HighThe Nasdaq Composite and S&P 500 finished in the red as semiconductor stocks struggled.
