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8% To 10% Balanced Portfolio Yield Investing In America: Part 2


  • This is a series of articles discussing retirement portfolios using BDCs currently yielding more than 12% and their safer notes, baby bonds/preferred shares with yield-to-maturities ranging from 6% to 9%.
  • This article discusses the interest expense and asset coverage ratios for one of the higher-yield BDCs (~13.5%) and its three Baby Bonds that I own.
  • This information is used along with portfolio credit quality to rank each Baby Bond as "Lower Risk," "Average Risk," or "Higher Risk."
  • Then I use the BDC Google Sheets to track real-time pricing, accrued interest, effective yields, yield-to-call, and yield-to-maturity to assess which ones are "Buys," "Holds" and "Sells."
  • 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 »


Over the coming months, I will have a series of articles discussing how to build a retirement portfolio using Business Development Companies ("BDCs") currently yielding over 12% and their safer notes - baby bonds/preferred shares with yield-to-maturities ranging from 6.5% to 9.0%.

This article discusses Fidus Investment (FDUS) currently yielding 13.5% and its Baby Bonds that trade under the symbols “FDUSG”, “FDUSZ” and “FDUSL" currently with yield-to-maturities between 8% and 9%.

Business Development Companies 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 Ares Capital (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.

Most BDCs typically do not directly invest in travel, entertainment, retail, restaurants, sporting event-related businesses, airlines, oil/energy, etc., and if they do it's a small portion of the portfolio. FDUS has 62 portfolio companies across 22 industry segments that include healthcare, aerospace, oil and gas, and retail, which are mostly second-lien and subordinated loans which is one of the reasons that I do not own common shares but I do own the Baby Bonds discussed next.

Source: FDUS Investor Presentation

First-lien debt has increased as a percentage of the overall portfolio from 8% to 19% over the last five quarters but is still much lower than most BDCs.

Source: SEC Filings

As of March 31, 2020, non-accruals account for around 6.7% of the portfolio fair value and 8.6% at cost:

The facts and circumstances were different in all three scenarios. One company was late paying us and the other was not fully operational due to shelter in place orders. They both did pay us our quarterly interest so those are the full non-accruals. And

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 FDUSG, FDUSZ, FDUSL. 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 (47)

Dennis Anderson profile picture
Are the terms Baby Bonds and Preferred Stock used interchangeably? I just talked to TDAmeritrade about being able to search for offerings, and the representative insisted that I was actually looking for preferred stocks.
BDC Buzz profile picture
Most people do not use interchangeably. There are only two Preferred stocks with BDCs and they have similar yields and priority to the Baby Bonds which there are quite a few so I sometimes lump together in the tables.
Their investment record doesn't excite. About half of their investments are valued below cost.
BDC Buzz profile picture
Conservative management typically undervalues its assets especially during times like this. Sort of an underpromise and over-deliver thing. It's better to focus on realized gains versus losses.
Thanks as always BDC Buzz for your detailed look overs of these BDCs. FDUS is on my watch list but never really been on my radar due to reasons you have outlined in the article.
BDC Buzz profile picture
FDUS is thinly traded as well but NAV performance has been impressive relative to most BDCs.
Robert Hutten profile picture
In reading this article, I am sort of reminded of something I read in Graham and Dodd's Security Analysis to the effect that if you would not but the common don't buy the bonds or preferred either as they all will suffer in a collapse.
Arsenal26 profile picture
Why don't you offer an etf centered on BDC investments ? I'd put money into it. You really are most qualified.
Interesting Times profile picture

We already have an ETF ......$BDCL In fact BUZZ consistently posts that he advises NOT to invest in it !
Interesting Times profile picture
Woops.. It no longer exists... I just checked... Buzz has a service that many subscribe to. My investment philosophy is DGI...
BDC Buzz profile picture
@Arsenal26 - I've looked into and obviously quite a few rules/regulations and would need to have at least $100 mm total to justify. Could do but quite a bit of work and the main benefit would be to promote activism in the sector.
LarryOswald profile picture
What is the "Blog feature"?
Interesting Times profile picture

Larry, i run a blog which means SA doesn't police it nor do they advertise that it even exists. Mine is going on a dozen years and we have had a small group who comments on different stocks almost every day..

It was once a TOP 5 blog until SA kinda wants to do away with it since it cost me nothing except my time. If interested send me a PM and i will send you our latest chapter. I bet it surprises you !!

Not sure how Buzz will run his.. But an article needs SA'S approval and they tinker with titles and even the content..
how do you access the blog?
Donggle profile picture
It's a simple question, can I stay solvent until the customer returns.
BDC Buzz profile picture
What are you referring to?
Donggle profile picture
Any security you may be tempted to buy if it is still beaten down, its the customers that feeds the food chain.
I thought Part 2 was going to explain your sell rating on MAIN. Am a bit anxious here;have had 9 dividend cuts.
Interesting Times profile picture
@G. Blair Bauer

I am also an owner of $MAIN. Although i really don't follow it closely when was the last dividend cut? I also missed if @BDC Buzz had a sell rating as well.

Thanks in advance..
Interesting Times profile picture
@G. Blair Bauer

I just looked up the dividend chart of $MAIN and see they have actually INCREASED their dividends since 2013. Do you mean another stock ?? Or do you mean you have other stocks that have had 9 dividend cuts?
Probably talks about other holdings not Main.
But Main stopped paying supplemental dividend paid in June and December this year but is it correct to call a cut?
In your portfolio chart you show notes and baby bonds. In the BDC world aren’t these the same?

Should this have shown preferred’s?
BDC Buzz profile picture
There are only two preferreds but the notes are different and for larger investors as they have much higher trading volumes. There were discussed in the following article:

Interesting Times profile picture
@BDC Buzz

Please keep up the good work. I have a decent size position in $ARCC so i look forward to any opinion you have on it..

BDC Buzz profile picture
Yes, I plan to cover ARCC and its Baby Bond AFC as well as the notes which are for larger investors.
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