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Credit-based businesses pass on hefty dividends.
One of the newest forms of dividend stocks to come out in recent years are businesses that lend out money in various forms, collect interest, and then forward most of those interest earnings to shareholders as dividends.
I happen to love these businesses because I’m a specialty lending broker, and have an endless fascination about ways to make money loaning money to people, ideally as secured transactions.
Investors seem skeptical of these businesses, and have sold off many stocks in the sector, likely due to residual fear of the financial crisis. That has discounted these stocks below where I think they should trade. That gives you the opportunity for both capital gains and generous dividends.
Cheap Dividend Stock No. 1: Full Circle Capital (NASDAQ:FULL)
Full Circle Capital (NASDAQ:FULL) is a specialty lender that operates as a business development company, which must spin off 90% of its income to shareholders. It makes asset-based senior secured loans, and occasionally invests in mezzanine loans or equity position. They invest capital on the smaller side of things, usually in the $3 million to $10 million range. It pays an 11.60% dividend.
They don’t toss money around like drunken sailors, either. They only invested in 14 companies this past fiscal year totaling $92 million. The company also announced it is moving into the healthcare sector, which offers great opportunities with companies often able to make good on payments.
Full Circle will target hospitals, senior housing, hospice, ambulatory care, diagnostic imaging centers, medical transport, medical equipment, laboratories, behavioral health and physician practices.
Cheap Dividend Stock No. 2: BDCA Venture, Inc. (NASDAQ:BDCV)
BDCA Venture, Inc. (NASDAQ:BDCV) takes the BDC concept one step further. Rather than just make an outright loan, the company instead invests between $3 million and $5 million as convertible preferred stock. The reason for this structure is because the firm only invest in cleantech, internet, software and technology companies that will go public within 18 months. That way, it can convert its investment into common stock and sell it for at least twice what it invested at the time of the IPO. It needs companies that are farther along that most BDCs invest in, requiring TTM revenue of at least $20 million.
Its most recent IPO was TrueCar (NASDAQ:TRUE), a data-driven business that allows car buyers to get market-based pricing on new and used cars. BDCA’s net asset value was pegged at $7.32, yet the stock trades at $5.80. The firm pays $0.10 per share as a combination of 25% cash and 75% stock.
It’s a good way to get in on an IPO incubator with 18 portfolio companies.
Cheap Dividend Stock No. 3: Manhattan Bridge Capital (NASDAQ:LOAN)
Manhattan Bridge Capital (NASDAQ:LOAN) is about as focused a company as you are going to find. You may be aware that Manhattan real estate is going crazy, and everyone is scrambling to build. Manhattan Bridge provides short-term loans to real estate investors to buy and build properties in New York metro area only. The loans are entirely secured by the real estate itself, along with the expected personal guarantees of the borrowers.
The loans are short-term in nature, so the risk of default is very low, and with the real estate as collateral, you are relying on management not to lend against a nuclear waste site. Then again, given the market, even a nuclear waste site in New York City would fetch a good price.
Be warned: this is a tiny company with an $11 million market cap, trading at $2.56. It pays a $0.28 dividend. It just made a secondary stock offering so it could offer more loans to investors.
Cheap Dividend Stock No. 4: RAIT Financial Trust (NYSE:RAS)
RAIT Financial Trust (NYSE:RAS) was the poster child for the financial crisis. It was heavily invested in mortgages and mortgage-backed secruities, and that’s what cratered the stock from its high of $112 in 2007. Today it is at $7.87 and has changed its business model. Today it invests in, manages, and services real estate-related assets, mostly in the commercial space. It offers loan solutions to the commercial real estate industry, but also owns and manages a portfolio of its own commercial properties, while collecting high-margin fees for managing real estate-related assets for third parties.
It’s a more secure business than it used to be, but the stink is still on the stock, even though it pays an 8.7% yield.
Lawrence Meyers does not own shares in any company mentioned.
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