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Though BDCs, or business development companies, may seem risky, they're really not. Like a mutual fund, a BDC typically invests in a relatively large number of firms over a range of different sectors, thus diversifying its otherwise high level of risk. BDCs also tend to perform well in bear markets. When credit is tight and banks are less willing to make speculative investments, more companies turn to BDCs for funding, enabling them to lock in more favorable lending terms.

One big reason to own BDCs is that they're tax-advantaged. BDCs are exempt from federal taxes as long as they, one, pay 90% of income to shareholders as dividends and, two, maintain a debt-to-equity ratio below 1.0. As you can imagine, the 90% dividend payout ratio typically leads to high dividend yields. But high yields don't necessarily equal "buy." Here is a breakdown of BDCs based on the overall consensus of analysts following each stock, also known as the equity summary score.

Bullish -- Buy

Main Street Capital (MAIN) is a business development company specializing in equity, equity-related, and debt investments in small and lower middle market companies. Main Street Capital has a current dividend yield of 6.64%, paid on a monthly basis. Main Street Capital is up 19% year to date. It has a high earnings yield of 12.13% and a low beta of 0.47. The company has an equity summary rating of 8.5 out of 10 for a bullish outlook.

Prospect Capital (PSEC) is a business development company. It is a private equity firm specializing in late venture, middle market, mature, mezzanine finance, buyouts, recapitalizations, growth capital, development, and bridge transactions. Prospect Capital has a current dividend yield of 11.34%, paid on a monthly basis. It has increased its monthly dividend for 26 straight months. Prospect Capital is up 16% year to date. It has a high earnings yield of 10.89%. Prospect Capital has an equity summary rating of 8.1 out of 10 for a bullish outlook.

Medallion Financial (TAXI) operates as a specialty finance company in the United States. The company engages in originating, acquiring, and servicing loans that finance taxicab medallions and various types of commercial businesses. Medallion Financial has a current dividend yield of 7.18%, paid on a quarterly basis. It has increased its dividend for six straight quarters. Medallion Financial has a high earnings yield of 9.59% and a low beta of 0.55. It has an equity summary rating of 7.8 out of 10 for a bullish outlook.

Triangle Capital (TCAP) is a business development company specializing in private equity and venture capital investments. It focuses on leveraged buyouts, management buyouts, ESOPs, change of control transactions, acquisition financings, growth financing, and recapitalizations in lower middle market companies. Triangle Capital has a current dividend yield of 9.36%, paid on a quarterly basis. It has increased its dividend 11.9% in the past year. Triangle Capital has a high earnings yield of 13.35% and a low beta of 0.51. It has an equity summary rating of 8.0 out of 10 for a bullish outlook.

Neutral -- Hold

BDCs rated as neutral can be classified as holds if you already own them. They are not considered buys if you do not own them. Here are the BDCs rated as holds:

THL Credit (TCRD) is headquartered in Boston, with additional investment teams in Los Angeles and Houston. THL Credit invests primarily in junior capital securities, including subordinated debt and second lien secured debt, which junior capital may include an associated equity component such as warrants, preferred stock or other similar securities. We project that it will perform in line with the market over the next six to 12 months. THL Credit has an equity summary rating of 6.2 out of 10 for a neutral outlook.

BlackRock Kelso Capital (BKCC) is a business development company that provides debt and equity capital to middle-market companies. Total net realized loss for the three months ended March 31, 2012, and 2011 was $0.3 million and $42.9 million, respectively. BlackRock Kelso Capital has an equity summary rating of 5.9 out of 10 for a neutral outlook.

Hercules Technology Growth Capital (HTGC) is a leader in customized debt financing for entrepreneurial venture capital and private equity-backed companies in technology-related markets including cleantech and life science. Hercules' earnings for the year 2012 are projected to decline roughly 4%. It has an equity summary rating of 4.3 out of 10 for a neutral outlook.

NGP Capital Resources (NGPC) is a closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940. It invests in private companies and from time to time may also invest in public companies. NGP Capital Resources had net realized capital losses of $30 thousand in the first quarter of 2012, compared to $0.5 million of net realized capital losses in the first quarter of 2011. It has an equity summary rating of 3.9 out of 10 for a neutral outlook.

Sell -- Bearish

Without going into any more detail than shown in the table below, these stocks are rated as sell candidates if you own them:

  • Gladstone Investment (GAIN)
  • Ares Capital (ARCC)
  • Golub Capital BDC (GBDC)
  • Kohlberg Capital (KCAP)
  • Solar Capital (SLRC)
  • MCG Capital (MCGC)
  • Pennantpark Investment (PNNT)
  • Apollo Investment (AINV)
  • Fifth Street Finance (FSC)

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Source: 17 High-Yielding BDCs - Buy, Sell, Or Hold?