Search For Yield: Bond Funds Vs. BDCs Paying 10%+ (SeekingAlpha).

Summary

  • This article compares high yield bond ETFs (HYG and JNK) to business development companies (BDCs) that have been outperforming the S&P 500 in 2019.
  • BDCs continue to outperform HYG and JNK but are still averaging over 10% dividend yield.
  • However, investors need to do their due diligence as there is a wide range of performance and yields as shown in this article.

This idea was discussed in more depth with members of my private investing community, Sustainable Dividends. Get started today »

This article compares bond ETFs such as the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) to Business Development Companies (“BDCs”).

As mentioned a while ago in “High-Yield Bond ETFs Are Getting Crushed by BDCs,” BDCs have historically outperformed HYG and JNK and the following chart shows the stock performance for HYG and JNK compared to the UBS ETRACS Wells Fargo Business Development Company ETN (BDCS) over the last six months but does not take into account distributions paid.

Source: Yahoo Finance

BDCs Offer Higher Yields

Clearly, BDCs offer higher yields due to the nature of their assets which is why I look at historical yield spreads (discussed later) to assess current market pricing. Even though BDC stock prices have appreciated more than most higher yield investments, they still offer much higher dividend yields with the average currently around 10.1% (much higher than the ETN BDCS with 8.3% due to fund fees and allocations).

Note: the dividend yields for ARCCCGBDFDUSGAINGBDCHTGCMAIN, and TSLX take into account semiannual and special dividends.

HYG and JNK Distributions

Declining distributions and mostly flat price performance have driven lower yields and relatively lower total returns for HYG and JNK as discussed next.

It should be noted that BDC dividends have also changed over the last 10 years with a wide range in performance (as shown below) which is why investors need to be selective. OTC:AINV and PNNT reduced distributions due to oil-related exposure as compared to PSECPTMN (formerly KCAP), and OCSL (formerly FSC) that invested in riskier assets combined with onerous fee agreements paid to management (for PSEC and FSC).

Comparative Total Returns

As mentioned in “Yield-Starved Investors Still Accumulating BDCs Paying More Than 10% Annually,” BDCs have been outperforming the S&P 500 in 2019 but are still paying above-average yields of more than 10%.

CGBD has been outperforming for the reasons discussed in “Time To Buy 11.3% Yielding CGBD With Upcoming Special Dividend Announcement And Share Repurchases”. Earlier this week, the company announced a special dividend of $0.08/share as predicted in the article.

Summary

The average BDC will continue to outperform HYG and JNK (and likely other high-yield bond ETFs) as well as providing much higher dividend yields. However, investors need to do their due diligence to carefully select companies that fit their risk profile and please diversify with at least 4 to 5 positions.

I am currently going through the Q1 2019 results for each BDC assessing dividend coverage potential and portfolio credit quality to establish appropriate price targets based on relative risk and returns. Currently, there are many BDCs below my Short-Term Target prices, providing investors with:

  • Higher dividend yields
  • Potential for capital gains
  • Total returns that are very likely to beat the S&P 500

The information in this article was previously made available to subscribers of Sustainable Dividends, along with:

  • Real-time changes to my personal BDC positions
  • Target prices and buying points
  • Real-time announcement of changes to dividend coverage and worst-case scenarios
  • Updated rankings and risk profiles

Disclosure: I am/we are long CGBD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have meaningful positions in 14 BDCs that were not discussed in this article (except CGBD) but were included in the last table.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

There is no affiliation between BDCBuzz and BDC News Wire.