Market Watchers Eye BDCs as Inflation Fears Ease
As the economy enters 2025, investors are shifting their focus to business development companies (BDCs), which are poised to benefit from a potential decrease in inflation and interest rates. This trend is expected to bring relief to lenders and financial service firms, making BDCs an attractive addition to any portfolio.
What are BDCs?
BDCs operate outside the traditional banking system, providing capital and credit to small- and mid-sized businesses. These companies play a vital role in supporting the US economy, and their high dividend payouts make them an attractive option for investors.
Wells Fargo Analyst Weighs In
Finian O’Shea, a Wells Fargo analyst, is bullish on BDCs, stating that they offer an improved relative entry point in the world of balance sheet financials. He highlights two BDC dividend stocks in particular, including one with a yield as high as 15%.
Runway Growth Finance Corporation (RWAY)
Runway Growth Finance Corporation is a BDC focused on minimally dilutive venture capital, providing capital support to new companies in the technology, healthcare, and consumer niches. The company’s strategy allows startup founders and early investors to maintain ownership, a key point for many startups.
Runway Growth has backed over 60 companies since 2015, with 91 deals totaling $3 billion in loan commitments. The company’s dividend yield stands at an impressive 15.3%, with a recent payout of 40 cents per share.
Ares Capital Corporation (ARCC)
Ares Capital Corporation is a credit provider in the US small business sector, offering essential resources to its client firms. With 20 years of experience, the company has built a substantial portfolio worth $25.9 billion, comprising 535 companies backed by 240 private equity sponsors.
Ares Capital’s portfolio is diversified, with nearly 53% comprised of first lien senior secured loans. The company’s income stream is generated from its portfolio, with a quarterly total investment income of $775 million in 3Q24.
The company’s dividend yield stands at 8.7%, with a recent payout of 48 cents per share. O’Shea praises Ares Capital’s sound performance and high-quality portfolio, stating that the company has demonstrated best-in-class credit performance throughout the Fed’s campaign.
Investment Opportunities
Both Runway Growth Finance Corporation and Ares Capital Corporation offer attractive investment opportunities, with high dividend yields and potential for growth. With the economy expected to shift towards pro-business and deregulatory policies, BDCs are poised to benefit from the resulting relief from debt pressures.
Investors looking to capitalize on this trend would do well to consider these two BDC dividend stocks, which offer a convenient mode for investors to generate returns. As O’Shea notes, BDCs appear to offer an improved relative entry point in the world of balance sheet financials, making them an attractive addition to any portfolio.
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