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

Another unique characteristic of BDCs that investors should know before buying is taxation. BDC dividends are typically not “qualified dividends” for tax purposes, which is generally a more favorable tax rate. Instead, BDC distributions are taxable at the investor’s ordinary income rates, while the BDC’s capital gains and qualified dividend income is taxed at capital gains rates.

After taking all of this into account, investors might decide that BDCs are a good fit for their portfolios. If that is the case, income investors might consider one of the following BDCs.

The Top 4 BDCs Today

With all this in mind, here are our top 4 BDCs today, ranked by expected total returns over the next five years. Stocks are listed from lowest to highest expected five-year return.

BDC #4: Gladstone Investment Corp. (GAIN)

Gladstone Investment is BDC that focuses on U.S.-based small- and medium-sized companies. Industries which Gladstone Investment targets include aerospace & defense, oil & gas, machinery, electronics, and media & communications. Gladstone Investment was founded in 2005, and trades with a market capitalization of just $450 million.

Gladstone Investment’s business model is relatively straightforward. The company lends money to small- and mid-sized companies. Position sizes for debt investments usually range from $5 million to $30 million. The company also takes equity stakes in such companies, with position sizes for equity investments typically ranging from $10 million to $40 million.

Source: Investor Presentation

The companies Gladstone Investment does business with usually cannot access debt or equity markets directly, as bond sales and public listings are not possible for them due to their small size. Gladstone Investment makes its money via spreads between the interest rates the company pays on cash that it borrows, and the interest rates the company receives on cash that it lends – the same principle as with banks.

Declining interest rates could turn into a headwind, but during the most recent quarter Gladstone Investment’s weighted average interest yield was actually up on a year-over-year basis, to 15.0%. The company generates additional earnings through appreciation of its equity investments.

Gladstone Investment reported its second quarter (fiscal 2019) earnings results on November 4. The company generated total investment income – Gladstone Investment’s revenue equivalent – of $16.6 million during the quarter, which represents a decline of 3.9% compared to the prior year’s quarter. This number beat the analyst consensus estimate easily, by $2.6 million, as analysts expected an even bigger decline for the company’s top line.

Gladstone Investment’s adjusted net investment income-per-share totaled $0.23 during the second quarter, which was in line with what the analyst community had estimated. Adjusted net income-per-share was down from $0.25 in the previous year’s quarter.

Gladstone is a monthly dividend stock, meaning it pays a dividend every month instead of once per quarter like most stocks. It recently raised its monthly dividend by 2.9%, to $0.07 per share. Annualized, the $0.84 per share dividend payout represents a high yield of 6.1%. We expect total returns of 5%-6% per year over the next five years, made up mostly of dividends as NII per share will likely be offset by a declining valuation multiple.

BDC #3: Prospect Capital Corporation (PSEC)

Prospect Capital Corporation provides private debt and private equity to middle-market companies in the U.S. The company focuses on direct lending to owner-operated companies, as well as sponsor-backed transactions.

Prospect invests primarily in first and second lien senior loans and mezzanine debt, with occasional equity investments. Prospect’s investment objective is to generate current income and long-term capital appreciation. The company went public in 2004 and currently has a market capitalization of ~$2.4 billion.

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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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