In fact, there are three such ideas I've found worth considering today.
Small cap yield # 1: 9%
Though categorized as a credit services stock, that's not actually what Fifth Street Finance Corp. (FSC) is. It's mostly a business development company, or BDC, offering conventional and bridge financing to smaller but established business. Many of the loans, however, include an equity component… which is where the growth opportunity is packed in for Fifth Street's shareholders.
Whether you define it as a fund, a BDC, or just a conglomerate, one thing is undisputable -- Fifth Street Finance knows how to drive consistent income, the bulk of which is passed along to shareholders.
While 2010 was a bit of an off year, with the company only earning $0.95 a share, 2011's earnings are expected to reach $1.17 a share.
Astute investors will notice that the trailing dividend yield of about 10% is slightly greater than the recently-projected earnings yield of 9.3%... a scenario that seemingly can't last indefinitely. Don't sweat it. The financier closed more than $270 million worth of new loans in the yet-to-be reported quarter ending at the end of December. That was by leaps and bounds the busiest quarter the company had seen all year, pointing to one key theme: business is picking up. The dividend rate should be easy to cover by mid-year at the current pace of business.
Small cap yield #2: 10%
With a dividend yield around 10% and a price-to-earnings (P/E) ratio of about 9, Israeli telecom Partner Communications Co. (PTNR) may well be one of the market's best-kept secrets.
In fact, Partner Communications is on pace to turn in its best year ever on the revenue and income fronts: analysts are looking for $6.5 billion in revenue and earnings per share (EPS) of $7.97. That's 6.9% and 8.1% higher than 2009's respective numbers, a feat underscored by five straight annual EPS increases and revenue increases in four out of the past five years. Yet, the market continues to overlook the stock. Big mistake.
Partner Communications has not only upped its bottom line in the past few years, but it's also increased its dividend payout accordingly. For perspective, shareholders received a total of $1.33 a share in dividends in 2006, but owners took in $2.09 a share in regular dividends in 2010.
The point is, the dividend is well protected, and growing with the company.
Small cap yield #3: 9%
And finally, Triangle Capital Corp. (TCAP) is another one of those off-the-radar ways to score some nice income on your investments while waiting for capital appreciation.
Like Fifth Street Finance, Triangle Capital is predominantly a business development company. And, like Fifth Street, Triangle Capital has gotten strangely good at driving consistent income. Like Partner Communications, however, Triangle Capital has clearly paired bigger bottom lines with better dividend payouts.
As of the last tally, the forecasted earnings per share for 2011 is $1.67. That's actually a little more than enough to cover the $1.65 worth of dividends -- a yield of about 9% -- paid out in 2010. Considering we're starting to see more earnings beats than misses from Triangle, however, don't be surprised if both figures inch higher this year.
Things to consider
But two small cap business development companies in the same portfolio -- each of which specializes in small company financing? Isn't that a tad concentrated, like owning two mutual funds from the same style box?
In some regards yes, but in most regards, no.
One of the advantages a BDC has that investors can't find anywhere else is a BDC's ability and willingness to invest in small, growing companies that are investment-worthy, but not always publicly-traded. These are the stocks that are most like the Amgens and Microsofts from 20 and 30 years ago, when each was a great idea practically nobody had heard of at the time (even if they were publicly traded then). But, each BDC has very unique investment opportunities presented to it that rarely make their way in front of other business development companies.
So, the industry actually offers a lot of built-in diversity, and more importantly, it offers the one-two punch of income as well as growth.
Action to Take --> It's tough to find the best of both worlds, but not impossible. Clearly though, you have to look at the smaller end of the stock size scale to find a decent selection of names with both good growth and income potential. And, you generally have to move quickly when you see such an opportunity, simply because other investors are looking for the same assets and can bid them up before you step in. Any of these three names mentioned are good options for investors.
-- James Brumley