Business development companies may earn a following for their hefty dividends, but it's important to remember that behind a BDC is an operating company. A place where people go to work, analysts analyze companies, and investments are made every single day of the week.

The business behind a BDC
Fifth Street Finance
(NASDAQ:FSC) put out an excellent video that shows how a BDC makes money for its shareholders. The video below illustrates the connection between BDCs and private equity groups. It's a must-watch.

Read this after watching
The video isn't a perfect description of all BDCs. For one, it focuses primarily on the kinds of deals Fifth Street Finance takes part in -- competitive deals from private equity groups. Fifth Street Finance generates substantially all of its lending and investment volume from private equity investors.

Other BDCs participate in private equity deals, but not to the same extent as Fifth Street. Prospect Capital (NASDAQ:PSEC), for instance, sources more direct deals, like a recent purchase of apartment buildings and a subprime automotive financier. The same is true of a company like American Capital Ltd. (NASDAQ:ACAS), which invests the bulk of its cash in its own buyouts of other people's companies.

In any event, the video should help new investors understand what BDCs do -- invest in the debt and equity of small companies that are too small to tap Wall Street financing sources on their own.

Sometimes these deals come with a private equity sponsor, and sometimes they're direct origination deals that the BDCs sniff out on their own. But behind every BDC is an investment business that competes daily to get the best-quality deals with the highest potential for profits. 

The power of continuous compounding
BDCs and other dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Fool contributor Jordan Wathen has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Compare Brokers