Hercules: Strength in Technology

01/05/2016 8:00 am EST

Focus: STOCKS

Tim Plaehn

Investment Research Analyst, Investors Alley

Paying a juicy 10.5% and bankrolling some of the hottest tech startups in the country, this is a must-have stock if you are looking to add exposure to a fast growing sector and keep your dividend income growing, suggests Tim Plaehn, income expert and editor of The Dividend Hunter.

New technology companies are a driving force in the current economy. With overall growth flat or declining in many sectors, a dose of new tech company exposure could add a nice return boost to your portfolio.

Our latest recommendation is a business development company that can give you exposure to the next generation of tech winners and let you earn a nice dividend yield as you wait.

Hercules Technology Growth Capital (HTGC) provides business loans to expansion stage technology companies. Hercules maintains relationships with over 500 venture capital and private equity firms and these firms direct their investments to talk to HTGC about their business borrowing needs.

Hercules spreads its loans out across a lot of companies. Currently, its $1.2 billion loan portfolio includes debts to 87 different companies.

Over its 12-year business life HTGC has made loans to over 325 different companies. Loans have floating interest rates currently averaging 9.4% with terms of 36 to 42 months.

As a BDC, Hercules can use up to 50% leverage with debt financing, which produces an effective yield of 12.6% on the loan portfolio.

The final kicker is that HTGC also receives warrant and/or equity positions from its client companies. The equity pieces provide extra profits to Hercules when a portfolio company launches an IPO or is taken over in an acquisition.

Basically, Hercules gets a small, but meaningful, no-cost piece of the venture capital action in each tech company it provides financing to.

Historically, the equity component has added an additional 3% to 4% to HTGC’s annual returns.

The equity investment returns can be bumpy, which is one factor that leads to the HTGC share price volatility. However, the company has a very strong history of steady dividend payments with occasional increases.

While it is tough to predict when Hercules Technology Growth Capital will be able to raise its dividend rate, the current quarterly payout of $0.31 per share is secure. That provides a current yield of 10.5%, which is not too shabby.

HTGC is a holding that will provide long-term benefits from its investments in startup tech companies and the short-term benefit of a high current yield. Now is the time to pick up shares of this underfollowed, high yield business.

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