I'm just wondering who here uses BDC's as a significant chunk of their portfolio?I am finding them mightily interesting with such high dividends, but currently lack a thorough understanding of them aside from the basics that they invest in small companies/perform leveraged take overs/pay high dividend/people claim the under perform after ipo too
I am finding them mightily interesting with such high dividends, but currently lack a thorough understanding of them aside from the basics that they invest in small companies/perform leveraged take overs/pay high dividend/people claim the under perform after ipo too That's quite a long sentence with multiple and conflicting issues. I am going to make three pointsabout BDCs and/or high yields1. A BDC borrows money at some level, say X%, and expects a return on its investment at somehigher level, say (X+Y)%.2. High yield involves risk. All things being equal, a higher yield usually means higher risk.3. A BDC typically spreads out its risk by investing in multiple small => medium-size companies. Suppose a BDC invests $100M, or $5M each in 20 companies.i. What happens if one of the invested companies can only repay with an X% return?ii. What happens if one of the invested companies fails to repay its investment?
When times are good, the BDCs are great. During the last downturn many of the BDCs were caught violating bank covenants because the market values of their investments droped and they couldn't meet their requirement of having their debt less than 50% of their assets. They were forced to sell off positions at large losses. Companies such as Allied capital dropped from $20 to under $2 and was acquired by Ares. The largest, ACAS, survived but is now selling for a third of its value 5 years ago. Given the history, you are taking a lot of risk in exchange for the great distributions.
I agree that BDCs can be risky investments.However, your two examples (Allied and ACAS) were two of the underperfomers. Most ofof the BDCs got slammed hard in late-2008/early-2009. But some, e.g. MAIN, ARCC have made a strong rebound since then.YMMV
Do a lot (no, I mean A LOT) of research, reading etc.Start out with the big boys, more liquid, highly respected, good management.MAINPSECFSC These are three that come to mind. Use a limit order, and don't overpay or "chase" the stock.Buy on pullbacks. Sell puts at where you want to own them would be a good strategy. I am half income, 1/4 growth and 1/4 cash right now. BDCs and REITs make up 40% of my income 50%, or to put it another way 20% of my total portfolio. (10% each category) Not sure I would go any higher.Stay away from the new BDC leveraged ETNs.REM is a good way to play mREITs if you must, but buy on a pullback, it's been on a tear.
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