Business development companies (BDCs) for high yield?

[Captain Cactus]

Hello, just checking with the community here to see what your thoughts are on business development companies. They are high-yield Individual stocks.  Some examples include: NEWT, MAIN, PSEC, HRZN.

By their very structure they are very high yield. 

Thoughts?

[Financial.Velociraptor]

I own some PSEC and it has performed as expected.  There is some potential interest rate risk with these as they are primarily mezzanine level lenders.  If you are too big for a local bank but too small to float a bond, you borrow from a BDC.  Recommend zeroing in on ones that 1) make variable rate loans 2) lend primarily on collateralized assets.

[protostache]

One thing to keep in mind is that BDCs are taxed just like REITs are. You'll be paying ordinary income tax at your marginal rate on most if not all of the dividends, unless you keep your BDCs in a tax advantaged account.

[Monkey Uncle]

Also keep in mind that they basically occupy the junk bond space in your portfolio.  The reason the yield is high is because of the credit risk.  It's not necessarily a bad idea to hold some high yield debt, just be wary of doubling up on BDCs and high yield bond funds, which might cause your asset allocation to be overweight in that category.

[Captain Cactus]

I own some PSEC and it has performed as expected.  There is some potential interest rate risk with these as they are primarily mezzanine level lenders.  If you are too big for a local bank but too small to float a bond, you borrow from a BDC.  Recommend zeroing in on ones that 1) make variable rate loans 2) lend primarily on collateralized assets.

Thanks Veloco,

A couple follow up questions:

How high would interest rates go up before having a significant impact on BDCs? 

Regarding the impact, are you referring to yield, share price, or both?

[Financial.Velociraptor]

Thanks Veloco,

A couple follow up questions:

How high would interest rates go up before having a significant impact on BDCs? 

Regarding the impact, are you referring to yield, share price, or both?

The interest rate risk depends on how much of the BDC portfolio is fixed rate.  They borrow short term and lend long - like a REIT.  So for fixed rate lending, every point in short term interest rate rise is one point of lost margin.

The impact will hit both yield and share price.  A double whammy.