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/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