For income investors looking for regular and long-term gains, business development corporations (BDCs) are a worthy choice. Not only do these new-age moneymakers bring magnificent yields, but they also protect investor capital by minimizing risks.
If you’re a dividend investor looking to expand your portfolio, here are 10 facts you should know before entrusting your hard-earned wealth to a business development corporation.
- BDCs emerged to fulfill the loan needs of mid-sized private businesses, which have always had a hard time securing loans from big lending institutions. These specialty funds serve an important market, providing debt and equity finance to small companies that make up about one-third of the country’s GDP.
- In contrast to venture capital funds, BDCs enable small, non-accredited investors to put their money in small and medium companies that are not otherwise accessible to such investors.
- A good BDC such as art penn pennantpark is extremely picky about the companies it invests in and doesn’t just go by the balance sheets when choosing a middle-market business to lend to. You should follow the same approach when building your portfolio—don’t pick a company that’s not making big profits or is not generating a decent cash flow.
- Even if you’re tempted to invest in a certain product, find out more about the BDC’s management, track record, and past earnings. In short, make sure the management is experienced and reputable.
- Because a BDC is a closed-end investment business, you cannot withdraw the invested capital (unlike a mutual fund).
- A BDC can minimize its tax payments by distributing 90% of its taxable earnings as dividends. This leaves limited usable income and therefore such companies rely on debt and equity funds for growth and expansion.
- There are two types of BDCs based on management structure: externally managed BDCs and internally managed BDCs. Both have certain advantages and disadvantages, and it’s best to educate yourself about this important distinction before choosing a BDC.
- For your first investment, find a trusted and successful BDC such as art penn pennantpark, which primarily invests in middle-market private companies. The corporation’s major investments are in the form of first- and second-lien secured equity investments as well as subordinated debt, and it is known to generate handsome yields for its investors.
- Remember that a BDC is only as good as its portfolio, which is a direct reflection of its management’s ability to choose superb investments and ensure high yields over time. For long-term success, work with a BDC that invests in solid concepts (products or services) with great potential and a distinct competitive advantage. This will ensure your capital is in safe hands.
- Lastly, evaluate the right factors before choosing a BDC, which include NAV (net asset value), ROE (return on equity), portfolio, and total return. While initially, it can be difficult to understand how BDCs operate, once you figure them out, you can make prudent investment choices that will bring high returns.
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