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If It Sounds Too Good to Be True…

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Your Survival Guy always looks at risk first and charts a plan from there. If it sounds too good to be true… In The Wall Street Journal, Charley Grant explains some of the drawbacks of business development companies (BDCs):

Competitive yields are tough to find in the stock market these days. For investors who aren’t averse to risk, business development companies offer an exception.

BDCs typically raise money from public stock investors that they then lend to small, often private, companies. After banks pulled back from lending in the wake of the 2008-09 financial crisis and again in March following the collapse of a handful of midsize lenders, BDCs helped fill the void.

They give individual investors the opportunity to tap into high-yielding private markets that are usually only open to big, sophisticated institutions. The companies pay out at least 90% of the interest they receive in cash dividends, much like real-estate investment trusts, adding to their popularity among small investors.

Double-digit dividend yields are the industry norm. Blue Owl Capital, for example, sports a forward dividend yield of 11.8%, based on its most recent declared payout. New Mountain Finance and Oaktree Specialty Lending offer 11.3% and 10.8%, respectively.

The 10-year U.S. Treasury—generally considered by investors to be free of default risk—yields 4.29%. Ultrasafe money-market funds yield about 5.16%, according to Crane Data, while exchange-traded funds that focus on speculative-grade lending typically used to fund corporate buyouts yield about 8.6%.

The fat yields on BDCs come with a catch: Unlike a standard fixed-pay bond, the payouts aren’t set in stone. What the shareholder actually receives depends on what the BDC earns from its investments. BDCs could end up paying dividends that are smaller—or larger—than projected. They are also typically taxed at a higher rate than most dividends paid out by corporations.

Action Line: When you’re ready to look at risk first, let’s talk.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.
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