Perspective of the Week

'Build A Solid Income Stream With These Slept On Investments"

It surprises me how unfamiliar dividend investors are with Business Development Companies, or BDCs. Like REITs, these were also created by Congress, coming two decades later in 1980. These were created to provide financing to small and medium-sized businesses in the United States.

In short, BDCs acts as banks for these companies as they don’t have the same access to capital as say a company like Microsoft (MSFT).

Think about it like this: If you have a low credit score in the 500 to 600 range, it’s unlikely that you can go to a car dealership and get approved for a Lamborghini.

But someone with an 850-credit score that makes a certain amount of money. Even if they can’t really afford it, they look good on paper. A bank is not going to provide a $1,000,000 loan to a company starting out as this is deemed too risky.

And that’s where BDCs come in to fill the gap. Like REITs, they are also required to pay out 90% of their taxable income in the form of dividends. They also have to have 70% of their investments in private companies, which make up most of their portfolios.

In addition, they are also highly sensitive to the direction of interest rates like REITs. REITs typically see price appreciation when interest rates go down. And BDCs see price appreciation when interest rates go up as a result of their predominantly floating rate portfolios.

BDCs usually borrow debt at fixed-rates and lend to companies at floating rates, the reason why they’re sensitive to interest rates. So, when interest rates are higher, they earn more income to pay out in dividends.

Another reason BDCs are attractive and deserve a position inside your portfolio is because of their higher yields and cheaper prices. These won’t see price appreciation like a JPMorgan Chase & CO (JPM), Walmart (WMT), Visa (V), or NVIDIA (NVDA).

But they can help grow your income stream. You can also use their dividends to fund your more growth-oriented investments in your portfolio.

The list below is just three of whom I consider to be high quality BDCs. And besides their requirement to pay out most of their income, you can build a solid (income) stream as you don’t have to spend hundreds of thousands to accumulate a significant number of shares.

• Ares Capital (ARCC): Current price $21.47 - pays a quarterly dividend of $0.48. Largest BDC by market cap.

• Capital Southwest (CSWC): Current price $21.23 - recently switched from quarterly to monthly dividends and their upcoming monthly dividend is $0.1934. Long operating history dating back to the 1960’s.

• Main Street Capital (MAIN): Current price $57.92 - is probably the most popular and expensive of the group as a result of its high quality and long track record of paying monthly dividends. They’ve also never cut their dividend since inception.

At the current prices, if you have a substantial amount of cash, you’d be able to build a nice solid income stream without breaking the bank.

And the fact that two of the three pay monthly helps build that dividend snowball at a much faster rate!

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