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.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.