Warren Buffett makes a lot of money each year from dividends. As a case in point, he noted in last year’s letter written to Berkshire Hathaway (BRK.A) (BRK.B) shareholders that one stock (Apple) paid $785 million in dividends in 2021 all by itself.
But Apple’s dividend yield of 0.63% is low. There are other stocks that Buffett owns that pay more attractive dividends. A few are especially noteworthy. There’s one Buffett stock that pays a 9.5% dividend yield — and you’ve probably never heard of it.
Taking care of business
Roughly two-thirds of the stocks in Berkshire Hathaway’s portfolio pay dividends. But you can find even more great dividend stocks in Buffett’s “secret portfolio.” I’m referring to positions held by Berkshire subsidiary New England Asset Management (NEAM). The stocks held by NEAM don’t show up in Berkshire’s regulatory filings, but Buffett has a stake in them just as much as he does in the stocks that Berkshire reports to the Securities and Exchange Commission.
Golub Capital BDC (GBDC) ranks among the most intriguing stocks in NEAM’s portfolio. The “BDC” in the company’s name stands for business development company. Business development companies (BDCs) provide financing primarily to small-to-mid-sized businesses.
The company was formed in 2009, but its roots go back to 1994 with the founding of its administrator, Golub Capital. Golub Capital BDC is led by two brothers — Lawrence Golub, who serves as chairman of the board, and CEO David Golub.
Golub Capital BDC focuses primarily on investing in senior secured and one-stop loans of middle-market companies in the U.S. The company’s portfolio totals close to $5.45 billion with 332 individual investments. Its top 25 investments make up 31% of the total portfolio.
An ultra-high dividend yield
You might be wondering how Golub Capital BDC can pay an ultra-high dividend yield of 9.5%. There’s a simple answer. BDCs such as Golub that are registered as Regulated Investment Companies (RIC) must return at least 90% of their income to investors to avoid paying federal taxes.
Golub Capital BDC has paid dividends since 2010. The company reduced its dividend payout in 2020 because of concerns related to the COVID-19 pandemic. Since then, though, Golub has raised the dividend twice.
Is Golub Capital BDC’s dividend safe now? If you only looked at the company’s dividend payout ratio of nearly 181%, the answer would probably be a resounding “no.” However, there’s more to the story. The dividend payout ratio is higher because of unrealized losses. But the company expects that a significant portion of those unrealized losses will be reversed over time.
There’s even a chance that Golub Capital BDC could increase its dividend in the near future. In the company’s quarterly update earlier this month, CEO David Golub said that the company is taking a wait-and-see approach for now but is evaluating the possibility of increasing the quarterly dividend, paying a one-time supplemental dividend, or both.
An income investor’s dream?
Golub Capital BDC could be an attractive stock for many income investors. Its juicy dividend yield is no doubt tempting. And the fact that Buffett owns it (albeit in an indirect way) could give the stock an extra measure of appeal.
However, there are some downsides to the stock. The nature of its business comes with risks, especially potential losses from defaults. Also, while Golub Capital BDC offers a high dividend yield, its share price has declined over the last 10 years. As a result, the stock’s total return lags well behind the S&P 500.
Dividends are important, but they’re not the only consideration — even for income investors. My view is that there are better alternatives for investors than Golub Capital BDC.
— Keith Speights
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Source: The Motley Fool