Asset Focus: Business Development Companies
A Business Development Company can be great addition to any portfolio or retirement account. They tend to pay monthly income at a higher than average rate. And, they offer the potential for capital growth. Welcome to our quick one-stop guide with everything you need to know about investing in business development companies.
What Is A Business Development Company?
A business development company (BDC) is a regulated investment company that invests in small and/or distressed businesses – providing them with access to growth capital. This has made them popular with income-focussed investors seeking managed exposure to the debt and equity of private companies.
BDCs are structured as closed ended investment companies. As such, they must distribute 90% of their income to shareholders. And, because of it’s regulated status, a business development company does not pay Federal income tax. Instead, individual shareholders pay their own taxes on income they receive.
There are currently (August, 2021) around 50 business development companies listed on a stock exchanges in the US. These kinds of stocks are known for paying relatively high yields, while also being potentially a little more risky than some ,more traditional companies due to the high level of debt they use and the smaller nature of the companies they invest in.
How to Invest in Business Development Companies
You can buy shares in a business development company in the same way as any other publicly-listed company. So you can use one of the many online trading platforms that provide easy access to the whole market.
Here are my top 8 examples of business development companies offering the highest yields as of August, 2021:
- Apollo Investment Corp
- FS KKR Capital Corp
- Goldman Sachs BDC Inc.
- TCG BDC
- BlackRock Capital Investment Corporation
- Portman Ridge Finance Corporation
- Investcorp Credit Management BDC, Inc
- Great Elm Capital Corp
You can download the complete list of all 47 business development companies, as well as all 53 publicly-listed stocks that pay monthly dividends right here using the form below.
What Returns Can I Expect From a BDC Investment?
A business development company stock will usually pay you a much higher yield than other types of stock. That is why they are particularly popular with income-focussed investors.
According to my quick desktop analysis, there are 8 BDS stocks that are currently (August, 2021) paying yields in excess of 9%. The vast majority of all 47 BDC stocks are paying more than 7% p.a. This compares favourably to the S&P500 at 1.35%, and interest rates in general.
Because many BDCs pay monthly dividends, they are especially popular with investors that are living off their investment income, as well as those leveraging the power of compound returns to grow their wealth quickly.
Are BDC Stocks Risky Investments?
A business development company – by the very nature of the investments it makes – carries more risk than a typical stock. They tend to invest in early-stage small and medium sized companies that are still growing. They also invest in distressed companies- including equity and debt. These types of investment are inherently risky.
Despite the shares in a business development company being liquid, the investments it makes makes are likely to lack liquidity. These types of investment might suffer sharp drops in estimated value.
This problem can be compounded by a BDCs use of leverage. While using debt to invest can increase return on investment, it also poses a risk and can magnify losses in a downturn.
Remember, do your own research. Do not invest an amount in any single asset that you cannot afford to lose. And always take professional advice in order to make investment decisions that are appropriate to your own personal goals and circumstances.
Conclusion and Resources
Informed investors make better decisions. If you want to learn more about business development companies and other investment that generate monthly income, you can further your research using the following resources:
- Garnaco – The Ultimate List of Investments That Pay Monthly Income
- Investopedia – Business Development Companies
- Garnaco – All 53 Stocks That Pay Monthly Dividends
- BDC Investor – A List of BDCs
- Publicly Traded Private Equity – About BDCs