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Here are my top 3 ultra-high yield dividend stocks to buy in April

The stock markets are off to a red-hot start in 2024 S&P500 And Nasdaq Composite have reached record levels, largely thanks to mega-cap tech companies leading the way in artificial intelligence (AI).

AI certainly represents an attractive growth market at the moment. However, investors can also supplement their portfolios with other options. A reliable source of growth can be found in dividend stocks.

Business development companies (BDCs) in particular are a unique source of passive income because they must pay 90% of their taxable income to investors each year. Let’s break down three leading BDCs that can help drive further gains in your portfolio.

1. Hercules Capital: 10.4% dividend yield

Hercules capital (NYSE:HTGC) is a leading BDC for companies in the field of technology, life sciences and sustainable energy. It specializes in an investment vehicle called venture debt.

Generally, in the early stages of building a startup, a company should raise money from venture capital or private equity firms. However, as the company matures, raising additional equity becomes less optimal for the founders due to the dilution that occurs.

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This is where Hercules stands out. Debt does not cause dilution and therefore will not reduce the share ownership of founders and employees. In addition, Hercules typically writes larger checks, compared to an average bank.

The catch is that because of this risk, the interest on Hercules’ term loans is much higher. Additionally, the BDC generally includes warrants convertible into shares in its deals, giving it an extra sweetener if any of its borrowers are acquired or pursue an initial public offering (IPO).

HTGC Total Return Level Chart

HTGC Total Return Level Chart

Over the past ten years, Hercules shares have achieved a total return of 270%. This not only demonstrates the company’s superior investment prospects, but also underlines the importance of reinvesting dividends.

With Hercules’ juicy dividend yield of 10.4%, it now seems like an incredible opportunity to acquire shares in this industry-leading BDC.

A notebook with the text Dividend Yield above a graph of investment returns.A notebook with the text Dividend Yield above a graph of investment returns.

Image source: Getty Images

2. Horizon Technology Finance Corporation: 11.7% dividend yield

Horizon Technology (NASDAQ: HRZN) is an important competitor of Hercules. The company also specializes in high-yield loans to venture-backed startups in technology, energy and healthcare. While its 147% total return over the last ten years doesn’t match Hercules’s, I’d say it’s not too shabby.

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HRZN Price to Book ChartHRZN Price to Book Chart

HRZN Price to Book Chart

Furthermore, Horizon’s price-to-book ratio (P/B) of around 1.2 is significantly lower than Hercules’. Each company is a leading BDC among startups, but the difference in valuation multiples depicted above could indicate that Horizon represents better value right now.

With a blistering 11.7% return, Horizon is hard to ignore. This could be a solid opportunity to supplement other dividend investments in your portfolio currently.

3. Ares Capital: dividend yield of 9.4%

The last BDC on my list is Ares Capital (NASDAQ: ARCC). Ares is actually very different from Hercules and Horizon.

The company tends to focus on lower mid-market companies across a wide range of industry sectors. Essentially, Ares has created a unique little niche within the BDC realm. The company works with companies that may be considered too risky or not attractive enough to work with a traditional investment bank.

However, Ares’ large balance sheet and astute approach to due diligence provide the company with a high degree of financial flexibility. As such, Ares can offer a range of more advanced financial solutions compared to other BDCs, including leveraged buyouts (LBO).

ARCC Total Return Price ChartARCC Total Return Price Chart

ARCC Total Return Price Chart

One of the most attractive aspects of Ares is that the company has consistently outperformed some of the leading exchange-traded funds (ETFs) in recent years. As seen above, an investment in Ares has the S&P 500-focused ETFs, such as the SPDR S&P 500 ETF Trust, Invesco S&P 500 Equal Weight ETFAnd Vanguard S&P 500 ETF.

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Ares has a rewarding track record and offers a business model that differentiates itself from other BDCs. As a result, this could be a great opportunity to pick up shares at a yield of over 9%.

Should you invest $1,000 in Hercules Capital now?

Consider the following before purchasing shares in Hercules Capital:

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Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

Here are my top 3 ultra-high yield dividend stocks to buy in April, originally published by The Motley Fool

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