Market Jitters, Dividend Winners: 2 High-Yields To Buy Now

Recent market volatility has undoubtedly spooked owners of high-flying stocks in the AI-segment, and that’s not too surprising, considering their already high valuations with plenty of growth already having been priced in.

Volatility has also dragged down the broader market as well, including those that pay high dividends that are well-supported by cash flows. This isn’t a bad thing, of course, for value investors and retirees seeking to boost their income amidst higher prices for everyday goods and services.

This brings me to the following 2 names, both of which are now trading well off their recent highs thanks to market jitters. In this article, I highlight why each represents attractive buys for high income and potentially rewarding total returns, so let’s get started!

#1: Hercules Capital

Hercules Capital (HTGC) is a well-run, internally managed BDC that was founded over 20 years ago. Since then, it’s committed more than $20 billion in capital to more than 660 companies in the technology and life science space.

HTGC stands out for having a lower cost structure compared to other BDCs that also invest in technology and life sciences, as reflected by its 2.2% TTM operating costs as a percentage of gross assets. This compares favorably to that of peers Horizon Technology Finance’s (HRZN) 2.4%, and the 3.3% of both TriplePoint Venture Growth (TPVG) and Trinity Capital (TRIN).

Having a low-cost structure enables better shareholder returns, and this is reflected by a consistent track record of generating a Return on Average Assets and ROAE above that of peers, as shown below.

Moreover, HTGC has outperformed both the S&P 500 (SPY) and VanEck BDC Income ETF over both the trailing 5 and 10 years. As shown below, HTGC has produced a 157% total return since September of 2019, surpassing the 82% and 65% of SPY and BIZD, respectively.

HTGC has continued to demonstrate strong operating fundamentals, as reflected by total investment income rising by 8% YoY to $125 million during Q2 2024. Importantly, results are flowing to the bottom-line, with NII per share growing by an impressive 9% YoY to $0.51.

This was driven by a combination of strong borrower demand in the tech and life science space, especially after the collapse of Silicon Valley Bank in March of last year, and accretive equity issuances at a healthy premium to NAV, resulting in portfolio growth. The portfolio remains overall healthy, with investments on non-accrual sitting at just 0.9% of portfolio fair value.

HTGC is also generating a solid effective yield of 14.7% on investments. While it’s down from a peak of 16.0%, it’s still meaningfully above the 11.5% level from mid-2022, before interest rates started rising.

I would expect for HTGC to continue to perform well in the current environment, given that IPO activity is expected to remain soft, especially considering the recent market volatility. As shown below, IPO activity remains significantly down from 2021 levels.

Lower IPO activity benefits HTGC in that it means portfolio companies and potential new clients are going to be more reliant on venture debt for funding, and his is supported by record origination activity HTGC saw in the last reported quarter, with 63% of funding going to later-stage tech companies, which have a better margin of safety and more established businesses compared to early-stage.

HTGC also carries a strong balance sheet with Baa3/BBB- credit ratings from Moody’s and Fitch and $482 million in liquidity. It has a low regulatory net leverage ratio of 0.84x, sitting comfortably below the 1.0x – 1.35x leverage ratio for most BDCs and the 2.0x statutory limit for BDCs. Lower leverage gives HTGC flexibility to lever up should interest rates decline, which could help to offset lower yields on its floating rate debt investments.

I find HTGC to be attractive at the current price of $18.55, trading well below the 52-week high of $21.78 reached in July, with a 10.4% total yield including both regular and special dividends. The regular and special dividends add up to a $0.48 quarterly rate, which is covered by the $0.51 NII per share, as noted earlier.

While HTGC’s current 1.62x Price-to-NAV may be off-putting for some investors, I believe well-run internally managed BDCs should be valued based on earnings power rather than book value. HTGC doesn’t appear to be pricey from this perspective, with a forward PE of 9.1x. With a +10% dividend yield that’s covered by NII and a strong balance sheet with plenty of dry powder, HTGC is well-positioned to deliver solid capital returns for investors.

#2: Plains All American

Plains All American (PAA) issues a K-1 and is an energy midstream company with a large network of liquids and gas pipelines, transporting +8 million barrels of oil equivalent per day. It has a wide-reaching asset base that spreads across the prolific Permian Basin, Gulf Coast, Mid-Continent, and Canada/Rocky Mountains.

PAA is executing well in a strong demand environment, achieving 6% YoY adjusted EBITDA growth to $674 million during Q2 2024, exceeding analyst expectations. This was driven by market-based opportunities in the crude oil segment as well as higher tariff volumes.

Moreover, PAA’s NGL segment is seeing favorable spreads and is benefitting from lower than expected operating expense. These favorable trends resulted in management raising the midpoint of its full year adjusted EBITDA guidance by $75 million to $2.75 billion.

This is driven also by expectations of 200K to 300K increase in barrels per day for this year, with weighting towards the second half of this year, as well as contributions from 8 bolt-on acquisitions that PAA has made so far this year for an aggregate $535 million. PAA also intends to increase its exposure to fee-based businesses, resulting in more stable revenue streams, and this includes acquiring an additional 0.7% stake in the Wink to Webster pipeline this year for $20 million.

PAA carries a strong balance sheet with $3.2 billion in liquidity and has a low debt to equity ratio of 3.1x, putting it about on par with that of industry giants Enterprise Products Partners (EPD) and MPLX LP (MPLX). It also has BBB investment grade credit ratings from S&P and Fitch and plenty of dry powder with $3.2 billion in total liquidity.

PAA currently gives a 7.3% distribution yield, which is very well-covered by a 190% DCF-to-Distribution coverage ratio. Notably, PAA grew its annual dividend rate by $0.20 this year to $1.27 and targets $0.15 per share annual raises until a 160% coverage ratio is reached.

The stock is also attractive at the current price of $17.37. As shown below, PAA currently trades well-off its 52-week high of $19.17.

The current price equates to a Price-to-Cash Flow ratio of 5.6x, which seems very low, especially compared to that of MLP peers EPD and MPLX, as shown below.

With an investment grade rated balance sheet, a very well-covered 7.3% yield, and expectations for increased volumes, I believe PAA currently represents a bargain for value investors.

Investor Takeaway

Hercules Capital and Plains All American represent solid opportunities for income-focused investors amidst recent market volatility, with both companies offering high yields supported by strong fundamentals. HTGC, a well-managed BDC in the technology and life sciences sector, benefits from a low-cost structure and robust portfolio performance, offering a 10.4% total dividend yield.

Meanwhile, PAA, a midstream energy company with significant pipeline assets, provides a very well-covered 7.3% distribution yield, underpinned by growing volumes, strong liquidity, and disciplined capital allocation. Both companies offer potential for rewarding total returns through high income and their respective operational strengths.