This Warren Buffett Inventory Pays a 9.5% Dividend Yield — and You’ve got In all probability By no means Heard of It

Warren Buffett makes some huge cash annually from dividends. As a working example, he famous in final yr’s letter written to Berkshire Hathaway (BRK.A 0.51%) (BRK.B 0.31%) shareholders that one inventory (Apple) paid $785 million in dividends in 2021 all by itself.

However Apple’s dividend yield of 0.63% is low. There are different shares that Buffett owns that pay extra enticing dividends. A couple of are particularly noteworthy. There’s one Buffett inventory that pays a 9.5% dividend yield — and you’ve got most likely by no means heard of it.

Picture supply: Getty Photographs.

Caring for enterprise

Roughly two-thirds of the shares in Berkshire Hathaway’s portfolio pay dividends. However you could find much more great dividend stocks in Buffett’s “secret portfolio.” I am referring to positions held by Berkshire subsidiary New England Asset Administration (NEAM). The shares held by NEAM do not present up in Berkshire’s regulatory filings, however Buffett has a stake in them simply as a lot as he does within the shares that Berkshire studies to the Securities and Change Fee.

Golub Capital BDC (GBDC -0.14%) ranks among the many most intriguing shares in NEAM’s portfolio. The “BDC” within the firm’s title stands for enterprise growth firm. Enterprise growth firms (BDCs) present financing primarily to small-to-mid-sized companies.

The corporate was shaped in 2009, however its roots return 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 totally on investing in senior secured and one-stop loans of middle-market firms within the U.S. The corporate’s portfolio totals near $5.45 billion with 332 particular person investments. Its prime 25 investments make up 31% of the whole portfolio.  

An ultra-high dividend yield

You may be questioning how Golub Capital BDC pays an ultra-high dividend yield of 9.5%. There is a easy reply. BDCs akin to Golub which might be registered as Regulated Funding Firms (RIC) should return no less than 90% of their revenue to traders to keep away from paying federal taxes. 

Golub Capital BDC has paid dividends since 2010. The corporate lowered its dividend payout in 2020 due to issues associated to the COVID-19 pandemic. Since then, although, Golub has raised the dividend twice.

Is Golub Capital BDC’s dividend protected now? If you happen to solely seemed on the firm’s dividend payout ratio of practically 181%, the reply would most likely be a powerful “no.” Nonetheless, there’s extra to the story. The dividend payout ratio is increased due to unrealized losses. However the firm expects that a good portion of these unrealized losses can be reversed over time.

There’s even an opportunity that Golub Capital BDC might improve its dividend within the close to future. Within the firm’s quarterly replace earlier this month, CEO David Golub stated that the corporate is taking a wait-and-see method for now however is evaluating the opportunity of growing the quarterly dividend, paying a one-time supplemental dividend, or each. 

An revenue investor’s dream?

Golub Capital BDC could possibly be a beautiful inventory for a lot of revenue traders. Its juicy dividend yield is little doubt tempting. And the truth that Buffett owns it (albeit in an oblique approach) might give the inventory an additional measure of attraction.

Nonetheless, there are some downsides to the inventory. The character of its enterprise comes with dangers, particularly potential losses from defaults. Additionally, whereas Golub Capital BDC gives a excessive dividend yield, its share value has declined over the past 10 years. Consequently, the inventory’s complete return lags properly behind the S&P 500. 

Dividends are necessary, however they are not the one consideration — even for revenue traders. My view is that there are higher options for traders than Golub Capital BDC.