BDC stocks pay a 10% dividend on average and offer easy liquidity, making them a good vehicle to complement a fixed-income stream and remain diversified, Dean Choksi, vice president of finance at Fifth Street Finance—a BDC and alternative investment company—told PLANADVISER. “We’ve definitely seen an increased interest from institutional investors and RIAs,” Choksi said, adding that pension funds invest in BDCs because of their high dividend and stability.
Due to current low-interest rates, fixed income is not as high-yielding as it once was. However, if interest rates rise, Baby Boomers and investors with short time horizons who are invested in fixed income are at risk of significant principal decay and are looking to supplement their income through high-dividend paying stocks.
BDCs typically have dozens of companies within their portfolio (e.g., health care, education, technology, etc.). “So it’s generally businesses that have a defensible niche,” Choksi said. About one-quarter of Fifth Street’s portfolio is in health care, and about 16% is in technology, he said.
To be a BDC, a company must pass 90% of their revenue to shareholders, which makes it a great income stream, Choksi added. He estimates there are about 35 to 40 publicly traded BDCs.
Market Vectors ETF Trust recently launched the Market Vectors BDC Income exchange-traded fund (ETF) (NYSE Arca: BIZD), designed to provide pure-play exposure to BDCs. (See “ETF Focuses on Business Development Companies.”)
“Investing in BDCs provides exposure to private companies that many investors could not otherwise access, allowing for potential growth and yield generation,” Brandon Rakszawski, product manager for Market Vectors ETFs, said when the product launched.