Business development companies, otherwise known as BDCs, have had rough go of it since 2014. On average, BDCs lost 10% as a result of lower stock prices. If not for the high yields typically associated with BDCs, the returns would have been much worse.
With the average BDC down 10% year-to-date through March 7, the temptation’s very strong for investors to get in the game while bargains abound.
Dow Wealth Management’s chief portfolio strategist, Dr. Robert Stepleman, who’s also known as The Rational Investor to his Sarasota Herald-Tribune readership, believes only aggressive investors should own these high-yield investments that on average are 2.5 times as volatile as high-yield bonds.
Don’t say you weren’t warned because these stocks aren’t for the faint of heart! They’re priced at a serious discount due to the fear higher interest rates will lean on their business models something fierce.
For those of you who think you can stand the heat in the BDC kitchen, I’ve got three ways for you to make money now.
BDCs to Buy Now: Goldman Sachs BDC Inc (GSBD)
The most conservative approach to investing in BDCs would be to take a position in Goldman Sachs Group Inc (GS), which owns 16.5% of the Goldman Sachs BDC Inc (GSBD), a specialty lending business the bank took public a year ago at $20 per share. At the time it was the first investment bank to do so.
Lending money to middle-market companies primarily doing business in the U.S., its stock closed March 7 trading at $19.35, down marginally from its IPO price, which is a good thing when you consider that its BDC peers did much worse over the past 52 weeks.
Ares Capital Corporation (ARCC), the largest BDC in America with a $4.5 billion market cap, had a cumulative loss of 10% over the past year and its specialty finance competitors fared even worse, losing 25% in the same period.
As I said, BDCs are a volatile bunch.
Look through the list of companies GSBD has lent money to and you probably won’t find a whole lot of familiar names, but they all generate taxable income for the BDC, at least 90% of which must be returned to shareholders.
The current portfolio is valued at slightly more than $1.1 billion with loans outstanding to 39 companies whose median EBITDA is $28 million and whose loans yield 11.7% based on their fair value.
At current prices GSBD stock is yielding 9.1%; GS stock about 1.7%. The choice is yours but if you’re not one of those aggressive investors Stepleman referred to, you’re better off going through the side door.
BDCs to Buy Now: Market Vectors BDC Income ETF (BIZD)
If you think that BDCs have fallen too hard, but aren’t sure which company has the potential to rebound and trend higher, it makes more sense to play the field with the Market Vectors BDC Income ETF (BIZD).
Why? Because BIZD invests in a total of 23 BDCs, including ARCC, which has the highest weighting in the fund at 16.1% of the $78 million in total net assets. The BIZD ETF also holds GSBD with a 3.2% weighting.
Yielding 9.12% as of the past 12 months, investors find compensation for the risk associated with this type of investment.
If you’re going to play with fire, BIZD is a better way to go then investing directly in BDCs.
BDCs to Buy Now: Prospect Capital Corporation (PSEC)
Dividend Yield: 14.4%
It’s time to go direct to the source. Ares Capital and Goldman Sachs BDC have already been mentioned, but there’s at least 50 potential companies yielding, on average, a healthy 11.35%. Always remember, though, that such a high yield often comes with a heap of volatility.
So biggest is best, right? Maybe … but before you run out and buy ARCC, you might want to consider one other BDC.
Prospect Capital Corporation (PSEC) currently yields 14.4%. Investment Partners Asset Management portfolio manager Greg Abella really likes the company. “I like them for their forward yield, their discount to net asset value and I’m a fan of them because they trade at a low multiple of their earnings,” Abella told The Street in a recent interview.
A lot of BDCs including PSEC have been battered and beaten in recent times. So if you’re a serious value investor, these stocks must be considered for any speculative portfolio.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.