2023-09-11 06:23:00 ET
American stocks have done well this year, with the S&P 500 and the Nasdaq 100 indices rising by double digits. Inflation has stabilised slightly above 3% while yield is everywhere. The ten-year Treasury yield – commonly known as the risk-free rate – has risen to over 4%.
Further, money market funds are yielding above 5.65% while certificates for deposits (CDs) have risen to over 5.25%. Therefore, it is easy for anyone to achieve a positive return in a risk-free environment this year.
Are BDCs better investments?
Historically, Business Development Companies (BDCs) are some of the best approaches to earn an attractive return in the market. These companies have become particularly useful now that banks are boosting their balance sheets following the Signature Bank and First Republic Bank (FRC) implosion earlier this year.
BDCs are companies that provide capital in the form of private credit to small and medium firms. These firms love them because of the speed in which they approve their loans even though they tend to charge a higher rate.
BDCs are some of the best ways to achieve double-digit returns in the market. Most of the biggest companies have a dividend yield of over 9%, which is higher than inflation and the risk-free rate.
There are three main risks for BDC stocks. First, these companies tend to be taxed at a higher rate than other companies. Second, they usually underperform in a recessionary environment since many of their loanees struggle. Finally, these companies tend to have uneven returns over time.
Here are some of the best BDC stocks to buy now that they are doing better than the S&P 500. While the S&P 500 index has jumped by 17%, the S&P BDC Index has risen by more than 18%.
Ares Capital
Ares Capital (NYSE: ARCC) is one of the biggest BDC companies in the United States with more than $22 billion in assets. Its stock has a trailing twelve-month(TTM) dividend yield of 9.56% and a four-year average of 9.54%. The company has invested in more than 475 companies.
Most of these loans are first lien senior secured loans followed by second lien senior sacred loans. Ares Capital is a safe BDC that has a good track record of paying dividends to its shareholders.
Blue Owl Capital Corporation
Blue Owl Capital Corporation (NYSE: OBDC) is another BDC that provides loans to mid-market companies. It has over $12.9 billion in assets and has invested in 187 companies. Most of these funds, or 83%, are in senior secured investments, making them relatively safe.
OBDC is part of the larger Blue Owl Capital, a company that manages over $138 billion in assets under management. It has a dividend yield of more than 10% and is a relatively safe BDC to invest in.
Watch here: https://www.youtube.com/embed/xYXcJltnyx8?start=368&feature=oembedOaktreee Specialty Lending Corporation
Oaktree Specialty Lending Corporation (NYSE: OCSL) is another BDC that has invested in 156 companies. Like other companies, most of its loans (76%) are in First Lien followed by Second Lien (12%). Only 2% of these loans are unsecured. Most importantly, most of these loans are free-floating, meaning that the company benefits when interest rates rises.
Other BDCs to consider investing some of your money in are Golub Capital, New Mountain Finance, and Sixth Street Specialty Lending.
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