2 Amazing Dividends Averaging 9% Yield

Vivek Vishwakarma They say that the cream rises to the top, and that analogy can be applied to dividend stocks as well. There is a lot of hidden value in buying quality, best of breed companies that provide meaningful cash flow. This brings me to the following 2 picks, which offer investors yields ranging from 8-10%. Both are what I would consider to be top picks in their respective sectors due to unique attributes that set them apart from the rest. Both are also trading off their recent highs and offer dividends that are well-covered by cash flow. Let’s explore what makes each a compelling buy for income and total returns! #1: Hercules Capital Hercules Capital, Inc. (HTGC) is an internally managed business development company, or BDC, that’s been around for two decades, having committed over $20 billion to more than 660 companies in the life science and technology space. True to its form, HTGC maintains a lower operating cost structure due in part to it being self-managed. This means that investors are not only buying its book of assets, but also the management company. HTGC’s low-cost structure is reflected by its 2.2% operating expense ratio. While this is higher than the 1.7% of Capital Southwest (CSWC) and 1.3% of Main Street Capital (MAIN), that’s because HTGC’s core competencies of technology and life science requires more specialized expertise. Nonetheless, HTGC’s operating expense ratio is lower than that of tech-focused peers TriplePoint Venture Growth’s (TPVG) 3.3%, Horizon Technology Finance’s (HRZN) 2.4%, and Trinity Capital’s (TRIN) 3.3%. Having a lower cost structure enables HTGC to deliver higher return on assets and equity. As shown below, HTGC’s ROAA and ROAE have routinely beaten that of the peer average since at least 2020. Investor Presentation HTGC continues to deliver strong results for shareholders with total investment income increasing by 8% YoY to $125 million during Q2 2024. Moreover, NII/share grew by an impressive 9% YoY to $0.51 per share. This is due to portfolio growth with accretive equity issuances at a healthy premium to NAV, as HTGC is benefitting from a strong borrower demand and from bridging the demand gap since the failure of Silicon Valley Bank last year. It also helps that 97% of HTGC’s debt portfolio is exposed to floating rate in this higher interest rate environment. While the effective yield of 14.7% during Q2 is down from the 16.0% peak, it sits meaningfully above the 11.5% from the middle of 2022, before interest rates started going up. Management expects to see continued strong demand as IPO activity remains soft, thereby necessitating BDC funding as a viable funding source. This is supported by record origination activity during Q2, with 63% of funding going toward mostly later-stage technology companies, which have better established businesses and a margin of safety. Importantly, non-accruals remain low at just 0.9% of HTGC’s portfolio fair value. It also carries a low debt to equity ratio of 0.85x, sitting well below the 2.0x regulatory limit for BDCs. It also has plenty of dry powder to fund opportunities with $482 million liquidity. HTGC currently yields an attractive 10.5% including both base and special dividend. The base dividend is well-protected by a 128% NII-to-Dividend coverage ratio, and the total dividend is supported by a 106% coverage ratio. HTGC doesn’t appear to be cheap on the surface at the current price of $18.29 with a Price-to-NAV ratio of 1.60x. However, it’s a much better buy since dropping from a high of $21.78 reached in July. I continue to believe that well-run BDCs like HTGC deserve to be valued based on PE rather than book value. It doesn’t appear to be pricey from this standpoint, with a forward PE of 9.0x. With dividend yield over 10%, low-cost structure, and ability to tap debt and equity markets for funding due to low leverage and a premium to NAV, HTGC is an attractive income stock for long-term investors. #2: Ladder Capital Ladder Capital Corp (LADR) is my second pick. This is because it’s a well-run internally managed commercial mortgage REIT with significant insider ownership, as the management team and directors continue to own over 11% of the company, thereby resulting in high alignment of interest with shareholders. At present, LADR carries a $2.5 billion loan portfolio, which does not consist of any higher risk construction loans. It also carries a safe weighted average loan-to-value ratio of 64%, ensuring that borrowers have significant skin in the game. LADR also has high exposure to the safer first lien mortgages, which represent 99% of the loan portfolio. As shown below, property collateral is well-diversified by geography and consists of 34% Office, 33% Multifamily, and 17% Mixed-use, as shown below. Investor Presentation LADR also carries physical properties comprised of recession and ecommerce-resistant property classes such as multifamily, dollar stores, and grocery stores valued at $719 million, and a securities portfolio mostly (86%) comprised of AAA-rated loans and are 99% investment grade rated. LADR is delivering strong results with 10.5% return on adjusted equity during Q2 2024, which is unchanged from the same prior year period. It also earned distributable EPS of $0.31, resulting in a healthy 135% dividend coverage ratio based on the $0.23 quarterly dividend. Also encouraging, undepreciated book value per share grew by $0.03 on a sequential basis to $13.71, due to retained earnings after paying the dividend. LADR also maintains a strong balance sheet than peers Starwood Property Trust (STWD) and Blackstone Mortgage Trust (BXMT) with an adjusted leverage ratio of 1.4x, down from 1.7x in the prior year period. This compares favorably to the 2.3x of STWD and the 3.9x of BXMT. It also carries a substantial $1.5 billion in liquidity, enabling it to opportunistically invest in attractive opportunities as they arise. I find value in LADR at the current price of $11.77, equating to a 14% discount to undepreciated book value of $13.71. The meaningful discount combined with a 7.8% dividend yield, and strong liquidity profile and earnings power make LADR a solid choice for high yield and potential capital appreciation. Investor Takeaway Hercules Capital and Ladder Capital stand out as top picks in their respective sectors due to their strong financial performance and solid management. Both companies offer high and well-covered dividends, supported by robust cash flows and low leverage. HTGC, with its lower operating expenses and expertise in the technology and life sciences sectors, and LADR, with its conservative loan portfolio and significant insider ownership, are both trading below recent highs. This presents an opportunity for potential capital appreciation along with high yields of over 8-10%. These attributes make HTGC and LADR appealing for those seeking a blend of income and total returns in their investment portfolios.

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