Dear Mr. Berko: In my individual retirement account, I have 180 shares of Pfizer and 95 shares of Walgreen Co., and each is trying to merge with another company overseas to reduce taxes. My broker and I believe that moving to a foreign country to avoid U.S. taxes is anti-American. It creates a bigger tax burden on workers like me. This also bothers me because I worry about what would happen to their stock prices if they were to move out of the country. My broker thinks a foreign merger would cause the prices of those stocks to fall. He wants me to sell both stocks, in which I have good profits, and lock them in. I’m 62, and I just retired with $138,000 in my IRA, which includes $29,000 in cash. Because I need more income to supplement my Social Security and small pension, he wants to use the money from the sale of Pfizer and Walgreen Co. plus $15,000 of the cash to buy stock in four business development companies (list enclosed), paying an average of 10 percent. What do you think?
— JS, Akron, Ohio
Dear JS: If you’re not comfortable with the income you have at 62, you’d best return to work for at least 10 years or for as long as you are able to be productive. Real inflation (forget Washington’s claim of 2 percent) is easily 8 percent and headed higher. Meanwhile, you should expect your cost of living to increase by at least 40 percent in a dozen years. So I doubt that Social Security, your “small pension” and a $138,000 IRA can pay your bills unless you downsize your needs. Quitting a job is easy, but a comfortable retirement takes a lot of work, and most folks haven’t worked long enough.
Business development companies seek to invest in companies that grow rapidly and profitably. Like commercial banks, they make loans to those companies, but unlike banks, they may take an equity position to enhance their profits. Qualified BDCs must pay out 90 percent of their taxable income monthly or quarterly and may not invest more than 5 percent of their assets in a single company. I like your broker’s BDC selections, though I’d not be comfortable investing $40,000, which is 30 percent of your portfolio, in this sector. Frankly, I’m getting nervous as more and more retirees invest too much of their non-risk capital in high-yielding equities.
However, Ares Capital (ARCC-$17.88) is one of the largest, most highly regarded BDCs, with a portfolio of 192 companies (energy, automotive parts, financial services, retail, chemicals) that is valued at nearly $8 billion. The $1.52 dividend yields 8.9 percent and may be raised again this year to $1.89.
Hercules Technology Growth Capital (HTGC-$16.57) is a niche BDC focusing on the Internet, telecom, clean energy and biotech industries. Its portfolio has doubled in the past decade and should exceed $1 billion by early 2015. The $1.24 dividend yields 8 percent, and management will probably raise it by 20 percent this year.
Medley Capital’s (MCC-$13.04) $1.48 dividend yields a sweet 11 percent. Assets and net income have increased fourfold since 2011, and Wall Street expects the trend to continue. Goldman Sachs, Barclays, Credit Suisse and J.P. Morgan recently managed a secondary for MCC, and the dividend is likely to be increased next year to the $1.60-$1.65 level.
Fifth Street Finance (FSC-$9.86) is an impressive BDC, with only $2 billion in assets and an excellent management team. The $1 dividend, yielding 10.3 percent, should be increased this year, and BlackRock, State Street, UBS and Northern Trust are significant shareholders.
Just invest $5,000 in each BDC, and sit on your remaining cash.
I understand your frustration that corporate America is fleeing the U.S. to reduce taxes, but I think this will have a positive effect on their share prices. Apple, Microsoft, General Electric, Cisco, Google and a dozen others have $2 trillion molting in overseas accounts because our tax code reads “closed for business.” The signs in Ireland read “Open for Business.”
Malcolm Berko addresses questions about stocks. Reach him at P.O. Box 8303, Largo, FL 33775 or firstname.lastname@example.org.