#1 Tech Stock ‘Buy, Hold, Retire’ teased by Tim Plaehn

What is the “$2 billion tech stock” that The Dividend Hunter is teasing, which pays a “HUGE Dividend? Tim Plaehn’s income-focused stock advisory offers the chance to collect legal ‘backdoor’ earnings from early-stage silicon valley investments – a promising opportunity for those nearing retirement.

This is the way he explains the potential for retiring on a single stock.

He alludes to a “Little-Known Regulation from 1940” points out that a specific type of company distributes 90% of its earnings directly to shareholders, avoiding business earnings tax. This description strongly aligns with a specialized investment firm (BDC).

BDCs are specialized investment firms created to provide funding for small and mid-sized businesses—companies that are too big for conventional bank loans but not large enough to secure financing from Wall Street. These firms must primarily invest in smaller enterprises and are subject to strict leverage limits, preventing their debt from exceeding their equity. To retain their special tax treatment, they are obligated to return at least the majority from their taxable income (90%) income to investors in the form of dividends. As a result, they bypass corporate taxation, with the tax liability instead falling on individual shareholders. Their structure is comparable to Real Estate Investment Trusts (REITs), which also operate under a pass-through tax system where earnings are distributed rather than taxed at the corporate level.

Many Business Development Companies (BDCs) function as “mezzanine” lenders, frequently partnering in collaboration with the SBA to streamline small business financing. These lenders take on a portion of the borrower’s risk, sometimes gaining exposure to equity stakes or future cash flows in return. However, not all BDCs follow this model—some specialize in specific industries or employ unique investment strategies. The one in question appears to deviate from the typical approach. To spark your interest, here are a few intriguing clues:

Scott Bluestein-once worked as a UBS research analyst, now serves as the CEO of Hercules Capital. Seth Meyer holds the CFO position, whereas Michael Hara, the Managing Director, leads investor relations, bringing experience from his prior position at NVIDIA during its formative years.

Indeed, the company in question is Hercules Capital —the identical shares which Tim Plaehn formerly recognized as “Top Buy, Hold, Retire Pick of 2022.”

HTGC operates as a BDC with a niche focus on venture lending—a strategy that mirrors traditional BDC lending but targets early-stage technology startups. Since these companies often lack substantial revenue stream to qualify for conventional loans, Hercules structures its deals to include a bonus equity stake—allowing it to share in the upside if its portfolio companies achieve major success, such as going public through a high-profile IPO.

To clarify, their main focus is lending, with approximately $3,000,000,000 in active loan commitments to 125 firms. However, they also have investments in equity and warrants, which are often included in lending deals to increase returns. These investments amount to approximately $150-200 million.

This stock has long been an appealing choice for investors seeking a “venture” style opportunity while still earning a strong dividend. During the last decade and a half, it has been teased multiple times, and its sustained gains over an extended period quite solid. The bulk of its gains stem from dividends—especially when those payouts are reinvested and allowed to compound. While its performance over the last decade has been volatile, it has managed to nearly match the returns of the S&P500, which is more than can be said for many other BDCs. In fact, it has significantly outperformed most funds that promise early exposure to “tech” venture capital.

The stock’s trajectory is closely tied to the sentiment around venture funding, meaning it tends to surge in times of optimism and slump during downturns. For instance, 2022 was challenging, but the market has shown signs of recovery since the end of 2023 along with into early 2024, largely fueled by renewed excitement around startups based in Silicon Valley powered by AI.

For investors eyeing this stock as a sustained strategy source of income, history provides some key insights. Significant market downturns—such as the 2008 financial crisis, the 2015-2016 slowdown, the market turmoil of 2020 due to COVID and the tech downturn following the SPAC bubble in 2022—have all had a notable impact on its performance. While it has delivered solid returns through dividends, a direct comparison with the S&P500 (represented in orange) reveals that HTGC hasn’t been a guaranteed path to wealth accumulation throughout the last two decades.

When investing in a high-yield dividend stock, setting realistic expectations is crucial. These stocks are generally not chosen for explosive capital appreciation but rather for their ability to generate steady income while maintaining their value. In the case of HTGC, reinvesting dividends over time would have led to a total return that outpaced the S&P 500 over a 20-year period. This outperformance is largely driven by the compounding effect of consistent and substantial dividend payouts, reinforcing the value of long-term income-focused investing.

So how is Hercules Capital performing now? The company continues to expand and has maintained a strong spread between interest income and interest expenses of 13.7%—a figure that would make any bank envious. This margin reflects the spread between their borrowing costs, which are funded by raising capital through debt offerings may become more expensive over time, along with the revenue generated from their lending activities. While borrowing costs are expected to rise gradually, their loan portfolio benefits from variable-rate agreements and consistently high interest rates due to the elevated risk associated with the businesses they finance. The key to their strategy is maintaining a broad and well-balanced investment mix, ensuring that losses from unsuccessful companies remain manageable. Over time, this approach has proven effective—often outperforming other BDCs that lack Hercules’ specialization in technical biotech lending.

From a valuation perspective, periods of market optimism don’t always present the best buying opportunities for Hercules Capital. Historically, during bullish market phases, the equity security has typically climbed to about 1.6 times its book value, while in downturns, it has tended to stabilize around 1x book value.. Right now, it’s trading near the upper conclusion of that range. While the company uses NAV as its key metric—closely aligned with book value in most cases—its historical trading range has been between 1.1 times and 1.7 times NAV

As of their latest report, NAV stood at $11.73 like of December 31, meaning that at the current price of $18, shares are currently valued at approximately 1.5 times its NAV.. Interestingly, the stock was near the low end of this range back in October 2022, when many assets were hitting their lows. However, while it’s easy to say we’ll buy when prices drop, actually following through during periods of market turmoil is often much more challenging than it seems.

On the bright side, Hercules has increased its dividend for the year, now offering a quarterly payout of 40 cents payout along with an additional dividend of eight cents. That brings the total annual payout to $1.92, translating to a yield of exceeding 10% at the current price of around $18. More importantly, there’s no immediate risk of a dividend cut—management has stated they’re entering 2024 with $0.80/share in excess earnings in surplus profits, providing a cushion even if business conditions become more challenging in the short term.

As for potential turbulence, it’s tough to predict. The key factor remains the stability of the startup investment landscape—whether tech and biotech firms can sustain growth and meet their financial obligations. At present, the outlook appears stable. While biotech isn’t surging and funding for renewable energy projects has softened as a result of rising borrowing costs,, there’s still plenty of excitement surrounding Silicon Valley’s next big innovation. Anything tied to artificial intelligence and data centers continues to attract capital with relative ease. There’s no glaring red flag for Hercules, yet it isn’t priced at a discount when compared to its historical valuation. As with many solid businesses, the best buying opportunities often come when investor sentiment is low—something reflected in its long-term valuation based on historical patterns in its book value multiple.

This analysis underscores the importance of valuation when considering an income-focused investment like HTGC. While its high dividend yield has historically provided strong total returns when dividends are reinvested, buying at elevated valuation levels—such as 1.6 times its book value—has led to long stretches of underperformance relative to the S&P500.

For long-term investors, the key takeaway is that while HTGC can be a compelling income-generating asset, it is best purchased during periods of lower valuation. Historically, its stock has performed better when acquired near 1X book value, as opposed to times of heightened enthusiasm.

This shift in the risk-free rate is an important consideration. When Treasury yields were near 1-2%, a 10% yield on HTGC looked extremely attractive. Now that risk-free government bonds offer over 4%, income investors have more alternatives, which could put some pressure on higher-yielding stocks like HTGC.

That being said, HTGC has maintained its yield within a fairly consistent range throughout the last ten years, suggesting that its payout remains competitive even in changing interest rate environments. However, with stronger competition from bonds, the market may not be as quick to bid up HTGC’s price, especially if venture funding conditions become more challenging.

You can achieve a strong current yield and grow your income over time by reinvesting dividends for a few years. However, it’s crucial to remember that this represents a specialized lender operating in a highly cyclical sector. HTGC extends long-term financing at high interest rates to fast-growing startups that often operate at a loss. As a result, market downturns can be challenging—particularly when sentiment toward technology and biotechnology sours. While declines aren’t always severe, investors who bought in early 2022 at $19 a share endured a steep 40% drop within months. Given this volatility, caution is warranted.

The future impact of AI on venture capital and startups remains uncertain, introducing potential market swings. For investors in stable dividend-paying firms, closely monitoring financial health is essential. Although share prices may fluctuate, the company’s ability to sustain dividend payments should be the primary focus. During the turbulence of 2022, concerns about HTGC arose, yet it has since strengthened its financial position by lowering debt and enhancing shareholder returns. With ample capital for continued lending, the company remains in a solid position. Those considering an investment still have time to decide, as the next dividend announcement is expected around May 1st, with payouts following several weeks afterward.