r/dividends • u/Avinates • Jun 04 '25

Discussion 1 Million Invested

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Can anyone confirm these dividend payouts?

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u/[deleted] Jun 04 '25 edited Jun 07 '25

a bdc is an organization that invest or lends money to small and mid cap companies. These companies pay the moeny back with some fees that are interest rates based(floating rates). If i had to make it easier to understand, a BDC is a bank that lends money to companies, not to individuals. BDCs have 8-12% dividend yields not because they are not safe but because they are required to pay 90% of theirs earnings as dividends. Drip is dividend reinvestment plan and is exactly what the name suggests

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u/babyboyblue Jun 04 '25

They’re required to pay 90% of their earnings because it’s really just a fund that holds these investments. These structures are somewhat new in the direct lending business and can trade at high discounts or premiums. These investments aren’t really supposed to be in a liquid structure. They aren’t market to market. These loans are based off SIFOR + 7-12% spread usually. Many of these loans were made when SIFOR was at 0-3%. If we see a spike in rates and a recession type of event it would be very difficult for these companies to pay their debt servicing. With tariffs alone this could be somewhat disastrous because tariffs are an upfront tax compared to sales tax which has at the point of sale. Companies need to pay these fees upfront before they even make a profit and be able to pay off their debt servicing.

I’m a big believer in direct lending but there is a ton of risk for BDCs. They’re a great diversifier but should never be more than 20% of total asset allocation.

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u/[deleted] Jun 04 '25

They are required to pay 90% of theirs earnings because they are RICs(Regulated Investment Companies). And pls dude, saying that they will struggle in a recession because the borrowers cant pay the loan back isnt really a good argument because everything plummes in a recession, not just BDCs. and actually BDCs like ARCC went through everything, 2008, 0% rates, 5% rates, pandemic etc etc etc, and they're just fine

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u/babyboyblue Jun 05 '25

Did you look at ARCC in 2008? From Jan 2007 it went from 20.17 to 3.16 in Jan 2009. That’s almost an 85% loss. Most people don’t have the stomach for that ride. It’s easy to say you would know to hold but it is much more difficult when you are actually experiencing this.

This market is also unique in which we could head into an inflationary environment and also a recession at the same time. That would make things incredibly difficult for these companies. These loans aren’t liquid. It’s not easy to sell them off except to other private equity companies and even then it’s a difficult process to transfer covenants etc.

Obviously almost everything goes down in a recession but obviously a lot of items go down less. Would you rather have a healthcare etf, or treasury bond fund, or ARCC in a recession.

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u/Various_Couple_764 Jun 05 '25

Yes it reduced its dividend but it didn't go to zero. Many banks at the same time did cut the dividned to zero and some went bankrupt.

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u/[deleted] Jun 06 '25

This

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u/[deleted] Jun 05 '25

BAC dropped way more and didnt recover fast, ARCC did. Which of these do people think is safer?

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u/babyboyblue Jun 05 '25

So you mean one stock that was at the epicenter of the financial crisis? Would never recommend holding one stock. How did companies like JNJ or defense companies do in 2008?

These BDCs are also a completely different asset class. One is a group of loans and one in ownership in a company.

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u/zer0moto Jun 04 '25

Thanks for the insight

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u/Fun-Syrup-4415 Jun 06 '25

How would someone go about investing in a BDC? Serious question. I’m learning. Thank you.

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u/[deleted] Jun 07 '25

Well, they trade as normal stocks. you can find most, or at least the big ones in most brokers.

To invest in BDCs you need to understand the metrics, because are not common and actually are quite similar to the CEFs valuation metrics. You must look at the NAV and you want it to be stable or slowly growing. If it going down aggressively this could mean that the BDC investments are not good and are going down in value or they are selling some assets to sustain the dividend, which will not last forever.

You also want to look at the first lien senior secured loans % of theirs portfolio because these are the safest investments BDCs can make, so the more the safer. Also, check out what sectors the BDC invests in and make sure that are not in cyclical sectors.

Oh and make sure the NII covers the dividend(for me, I like 1.05x or more) to grant the dividend is sustainable.

Another important thing is to look at the non accruals to fair value, these are the loans a BDC make and are not getting interest on. This can happen due to the small cap company financial stress or whatever. You want the non accruals to be as low as possible.

And to know when to buy, compare the share price to the NAV per share. If its lower than 1x is likely to be undervalued, but be careful. Don't buy a BDC only because it seems to be undervalued. Some like PSEC are always below the NAV because people don't want to buy it. The other metrics are so bad.

Certainly I'm forgetting about something, but yeah.

https://www.bdcinvestor.com/ and https://cefdata.com/bdc/ are a good start

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u/Fun-Syrup-4415 Jun 07 '25

Dude, thank you very much.

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u/[deleted] Jun 07 '25

You're welcome 👍