The more I invest, the more I love venturing into new territory. As our dividend portfolio reaches $200,000, the thought of trying new things seems like a great idea. I noticed that I follow two separate yet distinct investing philosophies.
The first model is called Dividend Growth Investing (DGI). It consists of investing (and reinvesting) in large blue-chips companies. Over time, your shares, value, and income will increase.
The other model is called Income Investing. I will write an article on Income Investing; however, I wanted to create the first piece on business development companies.
Orange You Glad You Have Passive Income?
Business Development Companies (BDCs) are part of a segment of products I call “High-Yield.” High Yield products pay a large percentage of their profits through dividends. Other high-yield products include real estate investment trusts, preferred shares, and closed-end funds.
BDCs are a unique opportunity among the mix of other high-yield products. BDCs offer average people like us the ability to invest in businesses that we could not invest in on our own.
Most businesses in the United States do not trade on the stock market. That leaves about 99% of companies not trading on the stock market and available to standard investors. Enter BDCs.
BDCs invest in these bigger businesses that aren’t big enough or choose not to trade publicly. BDCs lend money to businesses to help them grow or sustain their businesses. So in a sense, they are similar to banks.
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However, there is a significant difference between BDCs and banks; BDCs can also accumulate equity in companies. This means that they issue debt and receive interest on their loans. But they can also request shares of these companies.
As the value of these shares appreciates, BDCs can also profit from the company’s growth. So, BDCs give investors the best of both worlds—debt and equity.
Why should investors buy shares of BDCs? Above all, BDCs offer excellent yields. Similar to REITs, BDCs pay most of their profits out in the form of dividends. These payments can be a boon to income investors.
How about price appreciation? I would not buy BDCs for price appreciation—high-yield products are usually cyclical. BDCs loan money to companies, so they make their money with the “spread” between what they can borrow and their lending amount.
So if a BDC can borrow for 3.5% and loan for 9%, they have a 5.5% spread. Now, when the federal funds rate is low, like today, then BDCs can borrow at a low cost—a positive for them.
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However, if the federal reserve decides to raise rates, BDCs would borrow at a higher cost, potentially charging the companies the same amount. They would then lose some of their ability to make profits.
So BDCs, like REITs, depend on the interest rates to make their profits. As rates rise, their share price may fall. You have to understand their cycle to make the best investing decisions.
What’s the best way to invest in BDCs? I invest by dollar-cost-averaging. Over time, I will buy them when they are at their highest and their lowest. As long as I purchase solid BDCs over time, I can collect high yields and have some capital appreciation.
You’ll Need $20,000/month in Passive Income
What are some solid BDCs? I currently invest in two business development companies. The first BDC is Ares Capital Corporation (ARCC). It is the largest BDC and is also considered a blue-chip stock.
The other BDC I invest in is Owl Rock Capital Corporation (ORCC). It is a relatively new company but worthy of my hard-earned dollars.
How do BDCs fit into my Income Investing portfolio? My income investing portfolio consists of BDCs, REITs, blue-chip high-yield stocks, closed-end funds, and dividend ETFs. I just started this portfolio under an M1 finance pie.
I intend to grow this portfolio to produce enough cash flow that it feeds itself into its entirety. Ideally, I would like it to make $300/month to reinvest into itself. Then I can build a similar one for my wife.
Conclusion. Income investing is more exciting than dividend growth investing, at least for me. I love watching my decisions lead to immediate income. However, with income investing and BDCs, you will need to be aware of their cycles.
As long as you prepare yourself for the highs and lows, you can earn a good amount from BDCs. I love to read about my two BDCs and see the smaller businesses in which they invest.
If you do begin to invest in BDCs, dig deeper. Ensure you understand their particular business model. If you love high yield and interesting, unique investment opportunities, BDCs may be right for you.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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