Understanding High-Yield BDCs And How to Choose the Best Ones for 2013

Indie Research

If you're a yield-hungry investor, you're probably familiar with master limited partnerships (MLP) like Kinder Morgan 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.

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

However, BDCs have since rebounded and are now operating in an attractive environment as many banks have pulled back from middle-marketing lending and risk-adjusted yields are attractive. They also are facing some possible regulatory tailwinds in 2013 as well.

In a new 80-page special report entitled Climb the Fiscal Cliff: 11 High Yielders for 2013, BullMarket.com gives its top-nine high-yield stocks for the new year, as well gives opinions on several high-yielding BDCs including two that made its top-11 list.

This is the 5th annual High Yield Report BullMarket.com has published. The 4-year cumulative return of the other reports are 166.2%, greatly outpacing the 73.9% 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 (AINV), Ares Capital (ARCC), TICC Capital (TICC), Solar Capital (SLRC), Senior Solar Capital (SUNS),PennantPark Investment (PNNT), Medley Capital (MCC), and Prospect Capital (PSEC).

For access to the 80-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 is up 33.3% from 2008-2011 versus a -14.4% return for the S&P, a 47.7% outperformance, topping the benchmark each year since the start of the Great Recession. 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.)

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