Is Now the Time to Invest in High-Yield BDCs? (KMP, NLY, ACAS, HGTC, AINV, ARCC, TICC, SLRC, PNNT)
If you’re a yield-hungry investor, you’re probably familiar with master limited partnerships (MLP) like Kinder Morgan Energy Partners (KMP) and mortgage REITs like Annaly Capital Management (NLY). You may have also stumbled across a group of small-cap high-yielding stocks known as business development corps, or BDCs.
These firms generally make money by financing small private companies. They mainly invest in debt securities with the goal of generating income, but sometimes they’ll also invest in warrants, preferred, and/or equity securities as well.
Most BDCs are registered as regulated investment companies (RICs), which requires them to pay out at least 90% of their profits in dividends. Additional profits come from capital gains when they exit an investment position.
Compared to other financial firms, BDCs use very modest leverage. In fact, they are only permitted to be leveraged on a 1:1 basis. However, the investments they make are generally more risky than say a mortgage REIT like Annaly — after all, their business model is making loans to small companies.
2009 was a difficult year for many BDCs due to the financial crisis, and some ran into real trouble, including American Capital (ACAS) and Allied Capita, which has since been acquired at a big discount. In general, these firms took on too much credit-quality risk and then ran into debt covenant issues.
However, some BDCs have taken advantage of the financial tumult to better position themselves to profit from the current economic environment.
In its daily report, BullMarket.com recently updated its outlook on several BDCs, including Hercules Technology Growth Capital (HGTC), Apollo Investment (AINV), Ares Capital (ARCC), TICC Capital (TICC), Solar Capital (SLRC), and PennantPark (PNNT).
In December, BullMarket.com named TICC as one of its top picks in its annual High Yield Special Report, a 65-page report that examined each pick’s dividend history, business activities, strengths, weaknesses, latest earnings report, and much more. Since then, the stock has returned a whopping 87%. Check out BullMarket.com for editor Geoff Seiler’s latest thoughts on the BDC sector and which stocks look the the most attractive and why.
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