A generic image of two people sitting across from each other

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 tamerasset managers since then, but they still find creative ways to generate high returns on capital.

I'm talking about private equity firms.

While privateequity shops have drawn the ire of some ofWall 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 lendingmoney 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 unconventionalinvestment -- 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 theirmoney .

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 itsendowment 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 onstock 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 inbull markets, when the value of their equity holdings rises and they canliquidate their holdings through initialpublic 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 recoverygains strength.

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

Dividend yields vary widely. Giants like The Carlyle Group (NYSE: CG ) and Blackstoneoffer 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 SavingsStocks --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 THLCredit (Nasdaq: TCRD ) .

In fact, after Apollo's announced fourth quarter earnings, the company boosted its quarterlydividend 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 effectivedividend yield of 19%.

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

KKR and Apollo, for example, recently made significantinvestments inreal estate . And as readers of my High-YieldInvesting newsletter know, I think there is money to be made in the rentalmarket as the country becomes a " Renter Nation ".

Carlyle bought controlling interests in a commoditieshedge fund . KKR also launched ahigh-yield bond fund targeted at individual investors. Apollo entered the distressed debtmarket in India.

While there's a big difference in their focus areas, mostoffer financing to mid-sized businesses to develop new products, expand into new markets orrestructure operations.

These are typically not start-ups, but more mature companies with operatingcash 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, companieswill 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 ofbear 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 thewave of an improving economy and strengtheningstock market.

[ Note: If you want to know more about Retirement SavingsStocks , then I invite you to check out this special presentation. These stocks are a smarter, safer, and more profitable approach to incomeinvesting . Simplyput , if you're looking for a second income stream for your retirement, then it's the only way to go. Click here to learn more .]

-- Carla Pasternak

Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story


Other Topics