BDCs can be an excellent source of high income, but they are not the holy grail that some investors believe. The group faces mounting pressures as well as categorical drawbacks (that are often overlooked). In this report, we share updated data on over 35 big-yield BDCs, review our concerns with the group, highlight 3 top BDCs that standout as attractive, and then conclude with a few alternative high-income opportunities that are currently worth considering too.
Saratoga: Big-Yield, Big Leverage, Big Write-Downs (40 BDCs Compared)
Saratoga Investment Corp (SAR) is a small-cap BDC ($300 million market cap) with a big yield (12.4%) and some big risks. The company’s high leverage isn’t as bad as it seems (thanks to SBIC loans), but it could still become a problem considering continued depreciation/write-downs on a few of its larger investments. After comparing Saratoga to 40+ other big-yield BDCs, we review its business, valuation, dividend and risks. We conclude with our strong opinion on investing.
Undervalued BDC: Big Climbing Dividend (9.4% Yield)
This BDC’s decision to defer its dividend led to a sharp decline in share price. We believe fears are overblown given its solid portfolio, liquidity and track record of outperformance. Even after the most recent partial reinstatement of the dividend, the stock is trading at nearly 30% discount to NAV, and we believe it offers an attractive entry point for investors with a little appetite for risk. We do caution that a prolonged and severe downturn remains a risk to our thesis. This article reviews the health of the business, valuation, risks, dividend safety, and concludes with our opinion on investing.
New Options Trade: High Upfront Income, Proactive Dividend Deferment, Saratoga Investment Corp
We are sharing a new options trade that generates high upfront premium income. Business Development Company (“BDC”) Saratoga Investment Corp (SAR) (they provide financing to small middle-market companies) was recently firing on all cylinders, but has decided to proactively defer dividend payments to shareholders as a result of the coronavirus. We believe the trade highlighted in this article is an attractive one to place today, and potentially over the next few days, so long as the underlying stock price doesn’t move dramatically before then.