Business development companies pay big yields because of their underlying debt investment portfolios. But their portfolios aren't solely dedicated to debt investments.
In fact, for companies like Main Street Capital Corporation (NYSE:MAIN) and Fifth Street Finance Corp. (NASDAQ:FSC), equity investments help generate net asset value gains over time. The gains from equity investments should, ideally, paper over eventual credit losses.
And there's even more reason to favor equity. Shareholders of Main Street Capital enjoy a much more tax-favorable dividend than investors in Fifth Street Finance, for instance.
In the following video, Motley Fool Bureau Chief David Hanson and Fool contributor Jordan Wathen discuss the role of debt and equity investments in a BDC's portfolio.