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Prospect Capital Corporation (PSEC), Apollo Investment Corp. (AINV): Look to Business Development Companies For Yield and Growth

BDC’s, or Business Development Companies, provide a wide range of financial services, often to lower and middle market companies. Many of them charge fixed interest rates for services including debt and equity investments, or buyout transactions. It’s reasonable to think of these companies as similar to private equity firms.

While these businesses might not be familiar to all investors, they have qualities that should be appealing to nearly everybody. Specifically, many Business Development Companies trade for attractive multiples of their earnings and pay huge dividends to shareholders.

Three solid candidates

Investors looking for yield in the current market environment would be wise to consider such BDC’s as Prospect Capital Corporation (NASDAQ:PSEC) and Main Street Capital (NYSE:MAIN).

Prospect CapitalProspect Capital Corporation (NASDAQ:PSEC) and Main Street are intriguing choices, not only because they have extremely high dividend yields, but they also pay their dividends monthly. Monthly dividend payments, instead of the traditional quarterly schedule, allow shareholders to compound their wealth over time even quicker, particularly for those investors who reinvest their dividends.

Prospect Capital Corporation (NASDAQ:PSEC) raised its dividend at the end of 2012 by 8% and its current annualized distribution of $1.32 per share amounts to a more than 12% yield at recent prices. Main Street Capital Corporation (NYSE:MAIN) recently raised its monthly payout by 3%. The company’s $1.86 per share dividend yields 7% at recent prices.

A third interesting company is Apollo Investment Corp. (NASDAQ:AINV)

Apollo offers a handsome yield of nearly 11% at recent prices, but it’s worth noting the company has cut its payout twice since 2008.

Attractive valuations aplenty

Apollo Investment Corp. (NASDAQ:AINV) recently issued its fourth-quarter and full-year financial report, and the results were mixed.

Net investment income per share was flat during the quarter and down 6% for the year ended March 31. The company invested $1.5 billion during the year, and CEO James Zelter points investors to the company’s strong underwriting standards and prudent investment philosophy to deliver attractive returns going forward.

Notably, Apollo Investment Corp. (NASDAQ:AINV) is a closed-end investment company, and at the end of the most recent fiscal quarter held a net asset value of $8.27 per share, up from $8.14 per share at the end of 2012.

That means that at current prices, Apollo is trading at a 9% discount to its NAV. Combined with its hefty dividend yield, Apollo Investment Corp. (NASDAQ:AINV) has the potential to offer investors the unbeatable combination of dividend income and considerable share price gains going forward.

On valuation, Prospect Capital Corporation (NASDAQ:PSEC) trades for 10 times trailing earnings and Main Street trades for only 8 times trailing EPS.

Main Street reported full-year investment income rose 37%. Prospect is also seeing similar success with its own investment projects. Prospect Capital Corporation (NASDAQ:PSEC)’s total investment income more than doubled in its fiscal second quarter year over year.