Buy up to 10% yield for solid returns

When it comes to stock investing, it pays to think like a business owner. Some entrepreneurs start businesses with the end goal of selling at a high price, just like investing in growth stocks like NVIDIA.NVDA) today.

Most successful entrepreneurs are sensitive to cash flow and getting rewards from their business in return for their efforts just like investing in value stocks that generate decent cash flow through dividends.

Entrepreneurs/investors Cash flow They tend to focus on payback periods (the time it takes to recoup your initial investment) and sustainable long-term wealth without the need to time your investments and then sell and move on to the next best investment.

This has led me to the following selection of stocks that I believe offer great opportunity in today’s market. The environment offers investors a combination of growth potential and cash flow from high dividend yields. Let’s explore why these stocks are worth buying right now.

1st place: Barings BDC

Barings BDC (B.B.D.C.) is an externally managed business development company managed by a subsidiary of MassMutual. It focuses on investments in the U.S. middle market with secured loan-to-value ratios below 50% and its portfolio consists primarily of first lien loans, which represent two-thirds of the total portfolio.

As shown below, an additional 6% is invested in second lien secured debt and 16% is invested in equity investments, providing potential upside to BBDC’s NAV per share if a portfolio company is acquired or goes public at a price above BBDC’s cost basis.

BBDC’s investment profile is the right mix of defense and growth industries with finance & insurance, business services, high technology, healthcare and aerospace & defense making up BBDC’s top five industries and accounting for half of its total portfolio.

BBDC benefits from the current high interest rate environment as 87% of its fixed income investments are floating rate. The health of its portfolio is also strong, with non-accrual investments making up just 0.3% of the portfolio value. BBDC’s NAV per share also increased to $11.44 in Q1 2024, up from $11.28 QoQ and up 1.4% YoY. As shown below, BBDC has demonstrated stable NAV/share performance over the past five years.

Meanwhile, BBDC has a healthy investment yield of 11.3%, which will allow BBDC to earn NII per share of $0.28 in Q1 2024, up $0.03 year-on-year and down $0.03 quarter-on-quarter (down from $0.31 in Q4 2023). BBDC NII per share exceeded the quarterly dividend rate of $0.26.

BBDC also maintains safe leverage with regulatory debt-to-capital ratios. 1.17 timesThis is within management’s target range of 0.9x to 1.25x and well below the regulatory limit of 2x, providing BBDC with the capacity to cover $215 million of unfunded commitments to portfolio companies and $65 million of unfunded commitments to joint venture investments.

I believe BBDC is worth its current price of $10.11, which equates to a price-to-book ratio of 0.88.ARCC) and Blue Owl Capital Corp. (OBDC) are currently trading at P/NAV ratios of 1.1x and 1.07x respectively, despite BBDC having a low proportion of non-funding investments and robust NAV/share performance in recent years.

2nd place: Kimco Real Estate

Kimco Real Estate (Kim) is the largest shopping center REIT in the United States with a portfolio of well-located properties. This is evident from the fact that 82% of KIM’s annual base rents come from Tier 1 markets across the East Coast, West Coast, and Texas, as shown below.

While the growth of e-commerce has been a hot topic in the retail industry for the past decade, in-person shopping is not a thing of the past. This is because KIM has successfully adapted to omnichannel selling, where online activity drives in-person sales. This is backed up by statistics from the National Retail Foundation. 70% 90% of online sales are fulfilled in-store, and omnichannel shoppers tend to spend 2.5 to 3 times more than single-channel shoppers.

These statistics favor KIM’s strategically located properties. 96.0% Occupancy was at 1.5% as of Q1 2024. Also, same property NOI increased a healthy 3.9% year over year, driven by favorable lease spreads of 35.5% on new leases signed in Q1, including a re-leased property formerly occupied by distressed retailer Bed Bath & Beyond, signaling strong demand from new tenants.

Management recently raised its full-year 2024 FFO per share guidance to the midpoint of the range of $1.58 from $1.56 previously, based on the expectation that leases will continue to provide healthy rent spreads through the year. The outlook for shopping centers remains strong, 49% A fifth of retailers plan to expand over the next five years, with 85% preferring an open space format.

Additionally, weak new supply is also a positive, as management estimates that developers would need to expect rents 30-50% above market rates to justify higher development costs in the current environment.As shown below, new supply of shopping centers continues to perform well relative to history and other real estate segments.

Importantly, KIM has a BBB+ credit rating from S&P and maintains a strong balance sheet, supported by a safe net debt-to-EBITDA ratio of 5.3x, well below the 6.0x ratio generally considered safe for REITs, with only $11.8 million of secured debt maturing this year and no unsecured debt remaining.

KIM also boasts a 5% dividend yield, with the dividend 61% dividend payout ratio.This leaves KIM with enough capital to further reduce the debt ratio on its balance sheet in the current high interest rate environment, if it so desires.

KIM is currently attractively priced at $19.28 and has a forward P/FFO of 12.1, well below its historical P/FFO of 14.7, as shown below: With a strong balance sheet, well-located properties, little new supply, and strong lease spreads, I believe KIM is worth trading at a historical P/FFO of 15. In the meantime, investors can look forward to solid total returns with a 5% yield coupled with my expectation that KIM can achieve mid-single-digit annual FFO/share growth.

Investor View

Both Barings BDC and Kimco Realty offer excellent investment opportunities that combine stability, growth potential and strong cash flows. BBDC is focused on first lien loans in the U.S. middle market and benefits from a high interest rate environment and solid portfolio health, offering attractive yields and favorable price-to-NAV ratios.

Kimco Realty, the largest shopping center REIT in the U.S., boasts well-located properties, high occupancy rates, strong lease spreads, and strong balance sheets with high dividend yields. Both companies offer investors a balanced combination of defensive and growth attributes that make them worth buying at current prices.