What's the Best Investment in the BDC Space?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Business development companies, or BDCs, are an important part of the market, investing in small and middle-market companies that are often overlooked by banks. For dividend investors, there are great opportunities in this space, as these companies can avoid corporate taxes, allowing income to flow to shareholders. Of course, some BDCs are better than others. Let's look at some of the best choices and strategies available for investors looking to gain exposure to this section of the market.

Prospect Capital (NASDAQ: PSEC  )
One of the most popular choices in this space is
Prospect Capital, a BDC that has made an entrance into new market sectors in recent quarters. Key examples here include new investments in auto lending and rental properties, but recent moves suggest that Prospect is looking to start focusing once again on its core strategies, such as senior unsecured debt. The most obvious advantage of owning the stock is its massive dividend, which is paid annually and currently yields 12.2%.

But there are tremendous opportunities for growth as well. Let's delve into the gains made in Prospect's reported assets over the last three years.

During the first quarter of 2014, Prospect closed more than $1.3 billion in loan originations. This Q1 increase was a record for the company and more than double the $607 million posted during the fourth quarter of last year. Prospect should start to see the benefits of this increased loan activity during the second quarter, and its added access to small-business lending is now poised to generate even greater returns for shareholders. The company has recently announced plans to support the recapitalization of Harbortouch Payments and to aid in IWCO Direct's refinancing deals, giving Prospect strong positioning in merchant lending. This is a highly competitive sector where it can be difficult to establish a foothold, given the complications of developing sustainable relationships with a stable borrower. Prospect Capital has not seen a loan enter into non-accrual status in more than five years, and all of these factors support the outlook for the stock in 2014.

Market Vectors BDC Income ETF (NYSEMKT: BIZD  )
While Prospect Capital offers some of the most stable (and highest-paying) exposure to the BDC space, the Market Vectors BDC Income ETF has positions in Prospect Capital and 27 other BDCs, offering diversified exposure to the industry. Other notable holdings include Ares Capital (NASDAQ: ARCC  ) , which is one of the biggest names in the sector with more than $8 billion in reported assets. Ares Capital focuses on a wide variety of industry segments in an investment portfolio that includes roughly 200 companies. Diversified exposure of this type can come in handy if one of the invested companies finds itself in default, as the overall impact on Ares' income stream would be limited.

Ares Capital's dividend doesn't compare to Prospect Capital's: Ares' stock yields 8.7%, so that's part of the price you pay for the greater diversification. For those looking to gain high-yield exposure in the BDC space, Prospect Capital is the best choice.

If your stance is more conservative, Market Vectors BDC Income ETF is still a suitable option for broad exposure. And its dividend yield, at nearly 7.9%, is still high compared to what is seen in other market sectors. This ETF is often knocked for its expenses, which at first glance might appear high at nearly 9.4%. But most of this number comes from the acquired fees that are not paid by investors, so the dent on total returns is not as extreme. This is because any ETF that buys into other funds (essentially a fund of funds) is required to include the underlying funds' fees as well.

In any case, the BDC space has options for nearly all investors. There are many options available for dividend investors who are looking to add some exposure to business development companies. Prospect Capital remains at the top of the heap -- but it is important to remember that that is more than one way to invest in the company.

Here Are 3 More Sectors You'll Want to Invest in
The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion-dollar industry. Our analysts have found multi-bagger stocks time and again. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Read/Post Comments (1) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2014, at 3:28 PM, mwright713 wrote:

    PSEC dividends are paid monthly (not 12.2%annually as the article suggests).

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2908206, ~/Articles/ArticleHandler.aspx, 8/30/2015 6:22:32 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Richard Cox

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
ARCC $15.68 Up +0.31 +2.02%
Ares Capital Corp CAPS Rating: ****
BIZD $17.09 Up +0.34 +2.04%
Market Vectors BDC… CAPS Rating: No stars
PSEC $7.71 Up +0.21 +2.80%
Prospect Capital C… CAPS Rating: ****