Understanding High-Yield BDCs And How to Choose the Best Ones for 2012

Indie Research

If you're a yield-hungry investor, you're probably familiar with master limited partnerships (MLP) like Kinder Morgan Partners (NYSE: KMP - News) and mortgage REITs like Annaly Capital Management (NYSE: NLY - News). 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.

The Great Recession was a difficult time for many BDCs due to the financial crisis, and some ran into real trouble, including American Capital (Nasdaq: ACAS - News) and Allied Capital (since acquired at a discount). In general, these firms took on too much credit-quality risk and then ran into debt covenant issues.

However, many BDCs rebounded and had strong runs in 2010, including TICC Capital (Nasdaq: TICC - News), which was one of BullMarket.com's selections in its 10 for '10: High-Yield Stock Picks for 2010 with a 96% one-year average return.

In a new 69-page special report entitled Nine Must-Own Income Stocks for 2012, BullMarket.com gives its top-nine high-yield stocks for the new year, as well gives opinions on several high-yielding BDCs including a new one that made its top-nine list.

This is the 4th annual High Yield Report BullMarket.com has published. The 3-year cumulative return of the other reports are 135.6%, greatly outpacing the 45.2% return of the S&P over the same period Among the BDCs covered in the report include Hercules Technology Growth Capital (Nasdaq: HGTC), Apollo Investment (Nasdaq: AINV - News), Ares Capital (Nasdaq: ARCC - News), TICC Capital, Solar Capital (Nasdaq: SLRC - News), PennantPark Investment (Nasdaq: PNNT - News), and Prospect Capital (Nasdaq: PSEC - News).

For access to the 69-page report, examining each pick's dividend history, business activities, strengths, weaknesses, latest earnings report, and much more, visit BullMarket.com. MLP investors would also be interested in BullMarket.com's dedicated MLP hub and earlier MLP special report.

A daily investment service that is committed to creating long-term wealth for its members, BullMarket.com's Recommended List of stocks was up +40% in '09 and up over +20% in 2010. Subscribers receive actionable market commentary, access to 40+ stock ideas on the Recommended List, and real-time trade alerts. Plus, sign up for a free trial today to view Bull Market's in-depth Special Reports - including its annual High Yield and MLP reports - and its timely Earnings Previews, which are published every Friday during the heart of earnings season. Get a Risk-Free Trial to Bull Market Today! (Please note returns are unaudited.)

View Comments (3)