Collect Up to 19% Dividend Yields By Investing Like the 1%

Right now is one of the best times to invest in some of the most hated companies in U.S. history.

And while they may be “hated,” they’re also some of the most successful.

Their roots trace back to the corporate raiders of the 1980s. Tycoons such as Carl Icahn, Victor Posner and T. Boone Pickens are part of their lore. They’ve morphed into somewhat tamer asset managers since then, but they still find creative ways to generate high returns on capital.

I’m talking about private equity firms.

While private equity shops have drawn the ire of some of Wall Street‘s hallway monitors — they’ve been accused of stripping companies down and costing American jobs — they’re also experts at maximizing profitability.

What’s their secret?

They sometimes act as knights in shining armor — helping troubled businesses turn things around — while lending money at exorbitant interest rates of around 16%, even in a near-zero interest rate environment.

Other times, these companies may deploy billions of dollars into an unconventional investment — like single family homes, for example — as I explained in this article.

Private equity is how the “1%” invests. Only the richest people and businesses in the country — the Mitt Romneys and Goldman Sachs of the world — trust these companies with their money.

They are a go-to vehicle for charities, university endowments and pension funds that need at least 8% in annual returns to meet obligations. Yale University, for example, keeps roughly one-third of its endowment funds with them.

The good news is you don’t have to be a part of the wealthy elite to participate in private equity’s outsized returns. That’s because about a dozen of them now trade on stock exchanges… They’ve become an oxymoron — publicly listed private equity firms.

And now is an opportune time to invest in them…

Private equity funds are not for all markets. They tend to do well in bull markets, when the value of their equity holdings rises and they can liquidate their holdings through initial public offerings (IPOs) or by selling them to other companies.

Low interest rates are also a positive. Cheap debt makes leveraged buyouts less costly and thus potentially more profitable.

Private equity firms generally commit capital for the long-term, usually five to ten years. The key is to buy them early in an economic recovery, as appears to be the case right now, and be prepared to hold them for several years as the recovery gains strength.

Last month, Blackstone Group (NYSE: BX) reported blowout fourth-quarter earnings, 43% above 2011’s levels. Apollo Global Management (NYSE: APO) did even better, boosting fourth-quarter earnings an astronomical 2,140% higher than a year earlier.

Dividend yields vary widely. Giants like The Carlyle Group (NYSE: CG) and Blackstone offer trailing 12-month yields below 4%.

Others, however, are set up as business development companies, or BDCs. BDCs must return 90% of profits to investors — which is great news for dividend lovers. These companies can make for great Retirement Savings Stocks  stocks that pay safe, rising dividends that can give retirement-age investors the potential second income we all dream about.

With a little digging, private equity yields of better than 6% can be found, including Apollo and THL Credit (Nasdaq: TCRD).

In fact, after Apollo’s announced fourth quarter earnings, the company boosted its quarterly dividend 162% to $1.05 per share. While Apollo’s dividend varies every quarter based on earnings, if it maintains its $1.05 distribution, then it would have an effective dividend yield of 19%.

While their structures may differ, Apollo and THL Credit share one thing in common. They will go just about wherever they can make money.

KKR and Apollo, for example, recently made significant investments in real estate. And as readers of my High-Yield Investing newsletter know, I think there is money to be made in the rental market as the country becomes a “Renter Nation“.

Carlyle bought controlling interests in a commodities hedge fund. KKR also launched a high-yield bond fund targeted at individual investors. Apollo entered the distressed debt market in India.

While there’s a big difference in their focus areas, most offer financing to mid-sized businesses to develop new products, expand into new markets or restructure operations.

These are typically not start-ups, but more mature companies with operating cash flow. THL Credit, for example, focuses on companies with revenue between $25 million and $500 million.

Middle-market companies are a particularly attractive niche now that banks have pulled back from lending to them as they seek to reduce risk in the wake of the financial crisis.

As a result, private equity can demand interest rates of between 14% and 20%. Despite this high rate, companies will still use private equity because they can borrow more capital than if they were to use traditional bank loans.

However, if you buy shares of these companies, beware of bear markets… Down markets and high interest rates can be tough because there’s less deal-making activity and the value of the holdings tends to decline. This pattern can lead to volatile earnings streams.

Action to Take –> My top two high-yield picks are THL Credit and Apollo Global Management. Either one of these could make ideal Retirement Savings Stocks. Both provide yields of more than 6% and appear to be riding the wave of an improving economy and strengthening stock market.

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