5 Great BDCs To Make The Most Of A Rising Rate Environment

Further, BDCs are structured in such a way that they pay nearly nothing in terms of corporate income taxes. Instead, they pay out nearly 90% of their taxable income to shareholders as dividends. In reality, they could distribute nearly 98% of their taxable income, which could result in dividend yields of 10% or more. 

BDCs also act as a hedge against rate increases. The reason that they prosper in such an environment is that conventional loans become tougher to secure. This is because banks firm up their lending norms when the cost of capital increases.

Further, they finance loans with stiff interest rates to small and middle-market companies. In the absence of BDCs, such companies would be unable to secure such loans. And, they usually pay rates of around 10% to service these loans.

Our Choices

As the economy goes from strength to strength, rates will only scale higher. In such an environment, BDC income will rise as they finance more high-yield deals for small and mid-sized companies. This is particularly true for BDCs with a large amount of floating-rate loans.

Investing in BDCs looks like a smart option at this point. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Prospect Capital Corporation (PSEC - Free Report) is a business development company. It lends to and invests in private and microcap public businesses.

Prospect Capital’s expected earnings growth for the current year is 20.3%. The Zacks Consensus Estimate for the current year has improved by 11.8% over the last 30 days. The stock has a dividend yield of 10.6%. It sports a Zacks Rank #1 (Strong Buy). 

Stellus Capital Investment Corporation (SCM - Free Report) is a business development company focusing on investing in privately-held middle market companies.

Stellus Capital Investment has a Zacks Rank #2 (Buy). The company has expected earnings growth of 6.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days. The stock has a dividend yield of 10%.

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