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8% To 10% Balanced Portfolio Yield Investing In America: Part 1


  • This article is the beginning of a series that will walk investors through building a balanced portfolio using BDC stocks, preferred shares, baby bonds and notes.
  • BDCs currently have an average annual dividend yield of 12% and are required to invest 70% of assets in U.S. private companies diversified by size and sector.
  • BDC stocks are currently pulling back from recent highs and investors should consider their baby bonds and preferreds currently yielding 6.5% to 9%.
  • BDCs will begin reporting results next month and investors should be watching closely and ready for a wide range of "winners" and "losers."
  • Looking for a portfolio of ideas like this one? Members of Sustainable Dividends get exclusive access to our model portfolio. Get started today »

Business Development Companies ("BDCs") were created by Congress in 1980 to give investors an opportunity to invest in private small- and mid-sized U.S. companies typically overlooked by banks. The following slide from ARCC breaks out many of the requirements of the BDC/RIC structure including 70% of assets in U.S. private companies diversified by size and sector.

Source: ARCC Investor Presentation

Most BDCs typically do not directly invest in travel, entertainment, retail, restaurants, sporting event-related, airlines, oil/energy, etc., and if they do it's a small portion of the portfolio. Also, most BDCs have been focused on "investing at the top of the capital structure in businesses with limited commodity and cyclical exposure." The following was provided by ARCC but is similar for most BDCs:

Source: ARCC Investor Presentation

One of the many reasons that I like BDCs is the non-bank structure that allows them to invest at multiple levels of the capital structure. This gives them a wide range of tools during volatile periods such as this so that they can support portfolio companies for the long term while providing significant upside potential for BDC shareholders.

All higher-quality BDCs have credit platforms that have been carefully building their portfolios with a potential recession in mind. However, this pandemic will be a true test of the underwriting skills of management and investors should be prepared for a wide range of "winners" and "losers," much of which already was priced in. BDCs will be reporting Q2 results next month and investors should be watching for potential portfolio credit issues that could lead to credit rating downgrades. Lower ratings would likely drive higher borrowing expenses that could put pressure on net interest margins and dividend coverage.

I have recently added Recession Case (“RC”) pricing to my research taking into account the potential for higher yield expectations

The information in this article was previously made available to subscribers of Sustainable Dividends, along with:

This article was written by

BDC Buzz profile picture

BDC Buzz is a professional money manager with over a decade of experience generating institutional-quality research.

He is the leader of the investing group Sustainable Dividends where he provides investors live portfolios with real-time updates, weekly BDC sector updates, company projection reports, baby bond reports, and live chat access to answer questions. Learn more.

Analyst’s Disclosure: I am/we are long MAIN, ARCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (75)

marcia58 profile picture
I have a current monthly subscription to BDC Buzz under my old email address: mnmarshee@aol.com. I need this changed immediately to my new email address: 4of5goldengirls@gmail.com (before we discontinue using AOL). I have tried to change it myself and it won't stick . . . and customer service is not answering calls. Can you help me please?
BDC Buzz profile picture
Sorry just read this comment. Did you try emailing subscriptions@seekingalpha.com
I'm currently a bit overweight in my portfolio with BDC's, and was thinking it might be a good idea to diversify more. Right now I have CSWC, HTGC, NEWT, TPVG, SCM, WHF, and ORCC, all roughly equally weighted. I'd like to trim 2 of them but honestly can't decide what to do. I was leaning towards SCM as one of them as they are moving away from monthly pay and haven't paid anything since April. Anyone have advice or thoughts? I'm a bit new to bdc's, sorry if it would seem to be obvious what to pick to trim.
BDC Buzz profile picture
Looks like futures are down this morning so another bumpy ride coming.
I have a love/hate relationship with BDCs. Currently 14% of my equity portfolio. I listen to and keep notes on the quarterly earnings calls. And when I lose confidence, I liquidate and don't look back. Last one I sold out of was GBDC. I heard many times that they would never issue new shares at a price below NAV and then what do they do? I am now down to 3 BDCs: MAIN, HTGC and TSLX. I hope they don't let me down by doing something stupid. My patience with them as an investment sector is waning.
Thank you!
Thanks for another great aritcle @BDC Buzz
Do baby bonds get taxed as income and capital gains like the BDCs?
BDC Buzz profile picture
Interest income from Baby Bonds - no cap gains.
Any thoughts on HRZN ?
Williams Bay Analytics profile picture
@BDC Buzz

Regarding this quote from the article:

"It's important to remember that BDCs have what's called permanent equity capital which means that during a worst-case scenario when investors are selling the stock, the company will not be forced to sell assets at a discount. BDCs can simply hold the assets/loans and continue to collect interest and principal payments through maturity with no capital loss to the shareholders as long as there are no credit issues."

I admit to having a bit of trouble with what you're saying here. A "worst-case scenario" would seem by its very nature to occur when there are obviously substantial credit issues. I don't think you would have the former without the latter. They go hand in hand.
BDC Buzz profile picture
You might want to research the term but basically it means that if investors sell their stock the BDC is not required to sell assets to redeem the shares. Same with CEFs.
Thanks for this article. I own common shares of MAIN, GAIN and HRZN, which for me is enough exposure to the BDC space for now. But I enjoy your articles and will continue reading and learning.
BDC Buzz profile picture
Three BDCs are a solid start.
Buzz, Thank you! It is as always as for another of your great articles!
BDC Buzz profile picture
You're welcome!
Thanks for the article Buzz. I have a question concerning ORCC. Thus far, according to Seeking Alpha Dividend History, it has paid one quarterly dividend ($0.31 plus $0.08) on May 15. Its second "quarterly" dividend was declared on May 5 but won't be paid until August 14. Can we expect two more "quarterly" dividends to be paid in the last four months of 2020? If not, the annual yield may be less than anticipated.
BDC Buzz profile picture
Please see my ORCC related links above for details but the quick answer is yes you will get the $0.31 plus $0.08 through 2020. Management already committed $0.08 supplemental as a part of the IPO and is coming out of their management fees.
DividendInvestorLA profile picture
I really appreciate your insights and the coverage you offer, but I do have to make one remark, which I hope you'll take kindly to:

With respect, using 3/18 as the basis for anything is just ridiculous. The market had collapsed and prices were dropping worse than during a historic crash.

Of course 3/18 was the day to bet the house, of course nobody did it as nobody (at least in the regular individual investor class) knew why prices were dropping 50% intraday or that they wouldn't go to zero since there was no information available.

3/18 was a traumatic experience and seeing it used as some sort of day of reference feels very wrong to me.
BDC Buzz profile picture
@DividendInvestorLA - You might have missed the part that mentioned "In a follow-up article, I will discuss recent and historical total returns taking into account dividends paid." This means that I will take a longer-term view of how BDCs have performed.

The following is from the Warren Buffett Berkshire Hathaway Annual Meeting Transcript 2020: "But going back to stocks, people bring the attitude to them too often that because they are liquid and quoted minute by minute that it’s an important that you develop an opinion on them minute by minute. Now, that’s really foolish when you think about. You just don’t know what’s going to happen. You know, at least in my view, you know that America’s tailwind is not exhausted. You’re going to get a fine result if you own equities over a long period of time. And the idea that equities will not produce better results than the 30-year Treasury bond, which yields one and a quarter percent now, it’s taxable income. It’s the aim of the Federal Reserve to have 2% a year inflation. Equities are going to outperform that bond. They’re going to outperform Treasury bills. They’re going to outperform that money you’ve stuck under your mattress. I mean, they are a enormously sound investment as long as they’re an investment and they’re not a gambling device or something that you think you can safely buy on margin or whatever it may be.
Imagine for a moment that you decided to invest money now, and you bought a farm....but the truth is, if you owned the businesses you liked prior to the virus arriving, it changes prices, and it changes, but nobody’s forcing you to sell. And if you really like the business, and you like the management you’re in with, and the business hasn’t fundamentally changed, and I’ll get to that a little when I report on Berkshire, which I will soon, I promise, the stocks have an enormous advantage. And you can bet on America."

This is my opinion as well so I take advantage of people who sell at rediculous prices fearing a general market collapse and historics crash is here. There were BDCs trading at 10% of book value like TPVG - f'ing rediculous and how can you not make money?

The only time I make very large purchases is when I am getting panic messages from subscribers wondering if all BDCs will fail blah blah - Chicken Little mentality. When there is blood in the streets, I go in and clean up and have done it 3 times in the last 4 years (January 2016, December 2018, and March 2020). Hopefully, subscribers have followed me and will continue to do so.
DividendInvestorLA profile picture
Thanks for the response Buzz. I'm afraid we are talking past each other, so I will move on.

Thanks for the info and ideas you give us in any case. :)
BDC Buzz profile picture
Yes, I understand your point which is why I mentioned "In a follow-up article, I will discuss recent and historical total returns taking into account dividends paid." This means that I will take a longer-term view because using March 18 is meaningless if you were not actively purchasing.
nick_the_professor profile picture
Unfortunately I sold MAIN recently around $36 after holding from around $20. I still like the company, and if anything I am a bit disappointed that I had to sell the stock after such a run up as it is a good company, but after a sell off in Feb with different economic circumstances with the stock around $40 and having it traded at $36 just a few days ago, it just became overvalued in my perspective for the time being, but I would re-buy again at a lower price if it ever gets there.

From $20 to $36 in 2 months is a bit too speculative for me. Personally I was expecting to hold this at least until 2021 for that type of price. Unexpected, but managing risk as well.

I still have some ARCC I bought around that time frame, but I also would not be adding here. Still holding that position.
I hold Main for steady consistent monthly income that continues to grow.
Long Main is a BDC blue chip that I will never sell unless the company goes south.
nick_the_professor profile picture
MAIN is a well managed company, however; for me there's a time to buy and a time to sell. Esp when I can rotate the money into other undervalued names.
BDC Buzz profile picture
@nick_the_professor - I'm a buy and hold and have been doing with MAIN since 2007. My returns table is only for SD Marketplace announced purchases.

But I agree about rotation into other BDCs that might outperform from a total return standpoint. Always a good move for limited capital.
Just see if you can put through a trade. I bought HCXZ through a Fidelity broker this afternoon for $24.88.
BDC Buzz profile picture
I have limit orders for many Baby Bonds waiting for volatility.
Dennis Anderson profile picture
Are baby bonds available through brokerage houses such as TDAmeritrade?
BDC Buzz profile picture
Not sure. I do not use them.
mickelsson profile picture
@Dennis Anderson Yes, they are. I bought PNNTG and NEWTI through TDA.
You can't purchase baby bonds on line through Fidelity. You have to call a broker to put your trade in.
BDC Buzz profile picture
That is not correct. I do it all of the time and might be something you need to adjust to your account.
I just ran into this problem and have another request in to equity to add an exception for me.
BDC Buzz profile picture
I think I had to that a long ago but forgot the process.
just curious what the experts in BDC analysis think about the percentage of secondary mortgage liens in say a portfolio like ARCC. Old school generally would frown on taking any kind of secondary lien.
BDC Buzz profile picture
Are you referring to equity lines on primary residences to reinvest in the market?
Excellent article! Question is for how long are you willing to wait for the next buying opportunity? How big is the probability to see prices from March in near future?

I am holding overweight positions in Arcc, Main, Gain and full positions Gain, Tcpc and Tpvg, and cannot decide where to put next purchase- new position (maybe GOOD, GBDC or PSEC) or add to existing positions.
PSEC.... really?
honyoker007 profile picture
PSEC...no, no...a thousand times no.
Proc profile picture
Holy cow! PSEC?
galicianova profile picture
Excellent article. I was stunned to note that at this time you own only main and arcc. Should I who hold also PNNT and TCPC be worried?
BDC Buzz profile picture
The only BDCs discussed in this article were ARCC, MAIN, FSK, OCSI, MRCC, PNNT, BKCC, TCRD, FDUS, HCAP, CPTA, AINV. I still own 12 BDCs but only ARCC and MAIN were discussed in this article. The other 10 BDCs that I own were not discussed.
PNNT and TCPC have been serial disappointments. There are better and best of breed BDCs to opt for if you are a long term income investor.
Any look under the hood ever of BCSF or ORCC?
thebellsareringing profile picture
Thanks for an excellent update. i do remember March opportunities. Sadly, at the time my cash position was depleted and missed a great buying opportunity.
I can relate. My delivery of investable cash arrived about a two weeks too late. Oh well, there are still some bargains - just not super bargains.
BDC Buzz profile picture
@thebellsareringing - I had been patiently waiting (as I am now) and just collecting dividends from my major purchases in December 2018.
BDC Buzz profile picture
@retired rookie - There are some bargains and looks like maybe another pullback is coming.
Real-Time Retired Guy profile picture
Thanks - looking forward to future articles.
BDC Buzz profile picture
You're welcome.
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