The Best BDC for Income Investors?
If you’ve been following this column, you would know that I’m a big fan of business development companies (BDCs). These are closed-end investment firms that often trade on major stock exchanges. So long as BDCs meet certain income, diversity, and distribution requirements, they pay little to no income tax at the corporate level. And because of their distribution requirements, BDCs have become some of the highest yielding names in the current stock market.
Today, I’m going to show you perhaps the most unique business development company, Newtek Business Services Corp (NASDAQ:NEWT).
Most BDCs make money by lending to middle-market and lower-middle-market companies in the U.S. They earn an interest income from these loans and distribute some of that income to shareholders in the form of dividends.
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Newtek, on the other hand, does a lot more than just lending. The company, along with its subsidiaries, provides a wide range of business and financial services, including payment processing, web hosting, business lending, health and benefits, bookkeeping, web development, and payroll management processing, among others.
In fact, Newtek has established itself as the go-to business solutions provider for small- and medium-sized companies throughout the U.S. It has more than 90,000 business accounts across all 50 states. (Source: “Analyst & Investor Day,” Newtek Business Services Corp, last accessed January 23, 2018.)
By providing both financial and business services, Newtek has a much more diversified income stream than a pure lending BDC. In other words, if one of its business segments encounters some problems, the impact on company-level financials will likely be limited.
At the same time, Newtek is internally managed, so it doesn’t have to pay management fees to an external manager. This allows the company to keep more of its profits to be distributed to shareholders.
Right now, Newtek pays quarterly dividends of $0.40 per share, giving NEWT stock an annual yield of nine percent.
Sometimes, a dividend yield as high as this is simply the result of terrible share price performance. But that’s not really the case for this New York City-based business development company. Over the last 12 months, Newtek stock actually surged 12%.
Business has been growing, too. In the third quarter of 2017, Newtek funded a record $103.6 million of small business administration loans, representing a 20.6% increase year-over-year. The company generated total investment income of $9.6 million for the quarter, up 22.3% from the year-ago period. (Source: “Newtek Business Services Corp. Reports Third Quarter 2017 Financial Results,” Newtek Business Services Corp, November 1, 2017.)
For a BDC that has to meet distribution requirements, a growing business will likely translate to higher dividends. Indeed, earlier this month, Newtek announced that it expects to pay total cash dividends of $1.70 per share for full-year 2018, which would represent a 3.7% increase from its 2017 payout. (Source: “Newtek Declares First Quarter 2018 Dividend of $0.40 per Share,” Newtek Business Services Corp, January 18, 2018.)
For investors looking for a high-yield stock that’s actually backed by a solid business, this unique BDC should be near the top of their watchlists.