EC 2020 BDC List And The Top 4 BDCs For High Income

Business Development Companies, otherwise known as BDCs, are highly popular among income investors. BDCs widely have high dividend yields of 5% or higher. The strongest BDCs also have the ability to raise their dividends on occasion. This makes BDCs very appealing for income investors such as retirees, especially in a low interest rate environment.

With this in mind, we’ve created a list of the BDCs we currently cover in the Sure Analysis Research Database.

You can download your free copy of our BDC list, along with relevant financial metrics such as P/E ratios and dividend payout ratios, by clicking on the link below: Click here to download your BDC Excel Spreadsheet List now.

Of course, before investing in BDCs, investors should understand the unique characteristics of the sector. This article will provide an overview of BDCs, as well as our top 4 BDCs right now as ranked by expected total returns over the next five years.

Overview of BDCs

Business Development Companies are closed-end investment firms. Their business model involves making debt and/or equity investments in other companies, typically small or mid-size businesses. These target companies may not have access to traditional means of raising capital, which makes them suitable partners for a BDC. BDCs invest in a variety of companies, including turnarounds, developing, or distressed companies.

BDCs are registered under the Investment Company Act of 1940. As they are publicly-traded, BDCs must also be registered with the Securities and Exchange Commission. To qualify as a BDC, the firm must invest at least 70% of its assets in private or publicly-held companies with market capitalizations of $250 million or below.

BDCs make money by investing with the goal of generating income, as well as capital gains on their investments if and when they are sold. In this way, BDCs operate similar business models as a private equity firm or venture capital firm. The major difference is that private equity and venture capital investment is typically restricted to accredited investors, while anyone can invest in publicly-traded BDCs.

Why Invest In BDCs?

The obvious appeal for BDCs is their high dividend yields. It is not uncommon to find BDCs with dividend yields above 5%. In some cases, certain BDCs provide 10%+ yields. Of course, investors should conduct a thorough amount of due diligence, to make sure the underlying fundamentals support the dividend. As always, investors should avoid dividend cuts whenever possible. Any stock that has an abnormally high yield is a potential danger.

Indeed, there are multiple risk factors that investors should know before they invest in BDCs. First and foremost, BDCs are often heavily indebted. This result is commonplace across BDCs, as their business model involves borrowing to make investments in other companies. The end result is that BDCs are often significantly leveraged companies.

When the economy is strong and markets are rising, leverage can help amplify positive returns. However, the flip side is that leverage can accelerate losses as well, which can happen in bear markets or recessions.

Another risk to be aware of is interest rates. Since the BDC business model heavily utilizes debt, investors should understand the interest rate environment before investing. For example, rising interest rates can negatively affect BDCs if it causes a spike in borrowing costs. That said, BDCs may benefit from falling interest rates. In the current climate of low interest rates, many BDCs could see a tailwind.

Lastly, credit risk is an additional consideration for investors. As previously mentioned, BDCs make investments in small to mid-size businesses. Therefore, the quality of the BDC’s portfolio must be assessed, to make sure the BDC will not experience a high level of defaults within its investment portfolio. This would cause adverse results for the BDC itself, which could negatively impact its ability to maintain distributions to shareholders.

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Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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