I recently read a good article highlighting the reasons for investing in business-development companies (BDCs). It correctly pointed out that since these businesses borrow at relatively low rates of interest and then lend out those funds at much higher rates, the net interest income distributed to investors (registered investment corporations must pay out at least 90%) often results in 10%-plus yields. Though they're awfully enticing, these higher-risk, higher-reward investments come with a huge caveat. I'll look at five currently paying double-digit yields.
IN PICTURES: 6 Major Credit Card Mistakes

High-Yield BDCs

Company Yield Discount/Premium YTD Return
Prospect Capital (Nasdaq:PSEC) 15.6% 103.5% -11.6%
BlackRock Kelso (Nasdaq:BKCC) 12.2% 106.3% 22.0%
Triangle Capital (Nasdaq:TCAP) 11.1% 135.5% 21.8%
PennantPark Investment (Nasdaq:PNNT) 10.3% 88.5% 9.9%
Apollo Investment (Nasdaq:AINV) 10.0% 106.0% 15.5%

Prospect Capital
To give you an idea of how risky some of these investments can be, I looked at a list of current and previous Prospect investees on its website. It lists Houston-based drilling services firm Deep Down (OTCBB:DPDW) in its portfolio. On August 1, 2007, it lent the company $6 million to grow and recapitalize its business. The loan was a senior secured note at 12.5% with a 3% payment-in-kind repayable over four years. The interest rate sounds fantastic until you look at Deep Down's income statement and realize that the company has made money in just one of the last six years. This gives you an idea what type of risk is taken by BDCs to get these returns. It isn't for the faint of heart.

BlackRock Kelso Capital
If you do invest in a BDC, I highly recommend that you go through its portfolio of loans to get an idea what type of opportunities it generally invests in. There weren't too many names I recognized as I went through BlackRock's list of investments. One I did know was Water Pik, the electric toothbrush company. I didn't even know this company still around, but apparently it is. BlackRock's lent them $30 million at 5.75% - one of the more generous rates to appear on its schedule. Virginia's Retirement Plan must like what BlackRock's doing, it owns 33.5% of the company. Credit strategies, of which BlackRock is a part, represent 10% of the assets held in Virginia's retirement system and those assets have beaten their benchmark in the latest one, three and five-year periods. This speaks volumes about the quality of BlackRock's assets in my opinion.

Triangle Capital
On May 11, Triangle announced that the Small Business Administration had granted the company a second license for $75 million on top of its first license that provides $150 million in government-backed SBA debentures. These debentures carry a current interest rate of 6% giving it an excellent spread on loans to its lower-middle-market customer. The transaction size generally is between $5 million and $15 million and its target are companies with annual revenues between $20 million and $75 million. In the first quarter, its average annual yield on its debt outstanding was 14.7%, leading to a 15% increase in its total investment income in the quarter. More will follow with this additional license.

PennantPark Investment
The company had a good first quarter ended March 31 with net investment income increasing 34% to $7.1 million from $5.3 million. During the quarter, Pennant made $68 million in new investments and so far the second quarter is turning out to be equally as busy. This should lead to further increases in its income levels. The company currently has investments in 47 companies at average of $12.5 million per investment. Ninety-five percent of its $600 million in assets are debt investments with the remainder in equity. If nothing else, you have to love the company's name.

Apollo Investment
At the end of April Apollo announced it was selling 17.25 million shares to the public, increasing the number of shares outstanding by 10%. Once the offering is finalized, the company will be sitting on $731 million in cash and cash equivalents - money that will be necessary to rebuild its portfolio because of some non-performing investments including a potential Innkeepers USA bankruptcy. Those in the know question whether it can continue to pay the $1.12 annual dividend given $600 million in realized losses in 2009. While it is one of the biggest BDCs out there, I have to wonder if current issues will slow earnings and ultimately affect the dividend payout.

Bottom Line
I've written about three BDCs in the past. If you can live with the higher risk, they are an excellent way for investors to generate a little additional income. However, don't bet the farm. (For more stock analysis, take a look at Three ETFs Looking For A Bounce.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center