It’s a tough time for investors trying to make sense of this market.
Momentum has been choppy. Significant questions remain about the U.S. government’s long-term borrowing capacity. Stocks are still quite overvalued historically. Warren Buffett has pushed his cash position to an all-time record.
All the while, companies are issuing weaker projections for next year. The prospect of weaker growth impacts cash flow expectations, which could fuel cuts to dividends. Those decisions would make life even more challenging for investors looking to generate income from rock-solid companies.
Well, there’s good news. For investors looking for steady income on a relatively conservative investment, consider Business Development Corporations with favorable lending strategies to the current environment. Let’s discuss.
Are you looking to diversify your investment portfolio while earning attractive yields? Business Development Companies (BDCs) might just be the right asset class for you.
BDCs are investment firms that provide capital and financial support to small and medium-sized companies.
They typically offer debt and equity financing to these companies, helping them grow and succeed. BDCs are required to distribute at least 90% of their taxable income to shareholders in the form of dividends.
By investing in a BDC, you indirectly gain exposure to a portfolio of various private companies. This diversification can help spread risk across different industries and businesses, reducing the impact of a single company’s failure on your overall investment. Great BDCs will have hundreds of investments across many different sectors.
Given that BDCs generate a lot of capital from lending, they can provide very attractive dividends. And these distributions can be much higher than traditional stocks or bonds.
That said, it’s very important that investors conduct due diligence on their investments.
What are We Seeking?
Within the world of BDCs, it’s important to understand the types of investments in a company’s portfolio. When evaluating these portfolios, I prefer to see a lot of senior-secured loans with an emphasis on first-lien loans.
Senior secured loans are a type of lending arrangement that offers a relatively low-risk investment option for lenders and investors.
If the borrower faces financial distress, “senior” loans have a higher claim on the company’s assets and cash flows compared to other creditors and shareholders. In addition, these loans are typically backed by collateral, like a company’s assets. This ensures that the lender can secure the value of their loan and reduce the probability of a big loss on the loan.
These agreements have a variety of other important components. They may have fixed or floating interest rates on loans with specific maturity dates. In addition, these loans typically have covenants, or conditions that the borrower must adhere to during the life of the loan.
Now, I like to focus on first liens for a reason.
First-lien investments are at the top of the capital structure. They’re No 1.
So, these loans are the top priority in terms of repayment in the event of a default or bankruptcy. In the event of a company’s financial distress, first-lien lenders have the first claim on the company’s assets and cash flows. This ensures that investors are less exposed to credit risk than other creditors or stockholders.
But in addition to a lower default risk, first-lien loans offer competitive yields, especially compared to traditional fixed-income investments like government bonds or investment-grade corporate bonds. They’re a great source of diversification for anyone looking to boost their income outside of traditional assets.
How to Play BDCS
I’ve just released my No. 1 value and income play for November 2023. We’re focused this month on a BDC that has 83% of its portfolio in senior secured loans, with a whopping 69% in first-lien investments. In addition, this company has a defensive portfolio to help us weather this storm, while paying an annual yield north of 9.0%. Best of all, it’s trading at about 90 cents on the dollar — well below its Net Asset Value or Tangible Book Value.
I’ve just released this exclusive opportunity in Tactical Wealth Investor. The only way you can get it is to take a drive with our members, and tap into the long-term potential of this winning investment.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
If you have any cash to dump into the stock market I am urging you…
Do NOT pour it into stocks!
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