On Monday, I delivered three high-momentum stocks that could continue to surge this week.
So today, we’re going to pivot a little and deliver something juicy for all the income-focused readers out there.
And when I say juicy – I mean it…
Because today’s pick is delivering a whopping 18% yield.
No, that’s not a typo, I did say 18%…
Almost four times that of 10-year US Treasuries – which are already at 16-year highs.
And this incredible yield has not “artificially” come from a plunging stock price…
With its stock only having moved by 1% this year.
So, instead of worrying so much about where the market is heading in the final quarter of the year…
Why don’t you sit back and enjoy a juicy 18% yield instead?
Eagle Point Credit Company Inc. (ECC)
ECC is another Business Development Company (BDC) – a listed entity that primarily invests in small and medium-sized enterprises. In ECC’s case, its preferred debt instrument is a Collateralized Loan Obligation (CLO).
CLOs are essentially a portfolio of loans with multiple tranches ranging from senior secured loans (i.e. the loans that must be paid back first and are covered by collateral) to equity. The higher on the capital structure, the safer it is, but the lower the yield – and vice versa.
As you might expect, ECC is aggressive in its pursuit of yield, focusing on the equity tranches of CLOs. This is what has allowed it to capture such astronomical yields.
CLOs – like bonds – are also tradable instruments, so there’s an active management aspect to all this too. If a CLO increases in value, the gain goes to the equity tranche (which ECC holds). As of June 30, 2023, the weighted average expected yield for the company’s CLO equity portfolio stood at 27.5% based on fair market value.
Obviously, this is not a risk-free yield. Higher rates put more funding stress on borrowers. And if borrowers default, it is the equity tranche that absorbs the losses first.
But ECC’s track record has been great. In fact, the company generated so much cash flow that they had to pay two big special dividends in 2022 and have bumped up their monthly dividend in 2023 by $0.02 each month.
In short, as long as you understand the risk, ECC could be a fantastic income play for your portfolio.
To your wealth,
Felix @ Ace of Investing
