Preferred status, profits and payouts.
The lofty world of private equity funds and hedge funds is out of reach for most investors. These invitation-only funds can be very profitable, but often require steep minimum investments. Thankfully, there are similar opportunities for investors with only a few thousand dollars in their investment account. Known as business development companies, or BDCs, these firms invest in small- and medium-size companies through loans with preferred status or direct equity investments. And best of all for income investors, as the investments generate returns, these BDCs return those profits to shareholders in the form of big-time dividends. Here are nine potential investments if you’re interested in BDCs.
Goldman Sachs BDC (ticker: GSBD)
You can buy common shares of the investment bank Goldman Sachs (GS), but there’s also a dedicated BDC via GSBD that is focused singularly on financing mid-sized corporations. Right now, its portfolio is quite broad and diversified. This includes more aggressive debt and equity investments in Asian alternative energy companies Conergy Asia Holdings and Kawa Solar Holdings, as well as health care firm American Dental Partners. And as GSBD is managed by Goldman staffers and benefits from the megabank’s strategic expertise, investors can have confidence that these bets are well-researched and well-founded.
Current yield: 8.6 percent
Gladstone Capital Corp. (GLAD)
Gladstone is a consistent dividend payer, with a fairly rigid investment philosophy for its targets: There must be limited market or technological risk, a diversified customer base, revenue between $20 million and $150 million annually and significant earnings. This allows GLAD to grab a bigger share of smaller companies, with a targeted range of $7 million to $30 million for any investment. That keeps the list of investments for this small-cap company fairly short, but also high quality — and yielding high dividends — as a result.
Current yield: 9.3 percent
Triangle Capital Corp. (TCAP)
One of the most diversified BDCs, TCAP likes to invest in a range from bakeries to hospice providers to semiconductor fabricators. There seems to be no company that Triangle won’t consider as part of its portfolio. Last year was admittedly a bit rough for Triangle as shares slumped 20 percent in short order just before Thanksgiving on news that the dividend was being cut from 45 cents to 30 cents a share. However; shares are up about 20 percent in 2018 as the company has stabilized — and at current prices, that yield is still worth more than three times U.S. Treasury bonds.
Current yield: 10.6 percent
Main Street Capital Corporation (MAIN)
Main Street Capital is another BDC that hit a snag several months ago but has bounced back nicely. Shares are down from its 2018 high but now up more than 10 percent from the 52-week low — and MAIN has kept its 19-cent dividend steady all the while, too. Regardless of short-term trends, however, MAIN is a highly-rated BDC that is widely held and valued at more than $2 billion. It has consistently grown its monthly dividend payout over the long term, from just $1.50 in annual payouts for 2010 to $2.78 last year.
Current yield: 5.9 percent
Oxford Square Capital Corp. (OXSQ)
Oxford Square, previously known as TICC Capital, changed its name in 2018 but remains a BDC with more than a decade of generous dividends to shareholders thanks to a strong track record of underwriting. It’s not easy to research a wide variety of companies and gauge their creditworthiness, but Oxford Square has an elite staff that includes the former treasurer of the New York Mercantile Exchange and a host of former investment bankers at big-name firms. This helps ensure a high quality portfolio, and high dividends from the returns on those investments.
Current yield: 11.3 percent
Apollo Investment Corp (AINV)
One of the better-known BDCs, Apollo Investment manages a $2.2 billion portfolio of about 90 companies including Bumble Bee tuna, Westinghouse electric and other big-name investments. Of course, it hasn’t all been easy sailing. Apollo recently embarked on a restructuring to get less exposure to the volatile energy sector, and to get more cost competitive. That includes dropping base management fees from 2 percent to 1.5 percent — good for clients, but cutting into cash for shareholders. Still, the move should pay off in the long term as AINV continues to win more business as a result.
Current yield: 10.8 percent
PennantPark Floating Rate Capital (PFLT)
For those unfamiliar with debt markets, floating-rate loans have adjustable rates that vary based on market conditions. And given that the Federal Reserve is raising rates and the 10-year Treasury is around 3 percent again, it’s nice to not have fixed rates that stay put at lower levels. That is allowing PFLT to cash in as its rates adjust higher, via loans to both smaller businesses as well as larger corporations like Verizon Communications (VZ).
Current yield: 8.3 percent
FS Investment Corp. (FSIC)
Though FSIC is a nearly $2 billion corporation, it’s trading for the bargain price of less than $8 a share right now. That’s incredibly attractive for investors who don’t have a lot of capital to get into high-priced private equity funds. FSIC invests in senior debt, meaning its loans take priority over “junior” financing deals, and that helps ensure that even if things go south that its bills get paid first. This doesn’t give as much upside as an equity investment, but does help fuel reliable dividends.
Current yield: 10.1 percent
Ares Capital Corp. (ARCC)
Ares Capital stands above most other BDCs with a massive $12 billion portfolio that is quite balanced. Right now about 24 percent of the portfolio is in health care, followed by another 18 percent in business services, but after that it’s a wide array of industries including restaurants, power generation and financial services. There is also diversification across geography in the U.S., which sometimes is hard to find in smaller BDCs. And, Ares offers all this with the same mandate for dividends. That makes it a bit lower-risk than some other business development companies.
Current yield: 9.1 percent
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9 Ways to Invest in Business Development Companies originally appeared on usnews.com
