065 - The Top 5 Ranked BDCs According To The Experts

With interest rates about to drop. 1 of our favorite sectors should do well despite what people think. That sector is BDCs. 

There are about 60 of these bad boys, but which do you choose? We’ve compiled a list of 5 BDCs that most experts and successful investors would put in their top 10. 

If you want some of the highest yielding companies in your portfolio, you gotta have at least 1 of these BDCs.  We're in 4 of the 5.

• AARC
• HTGC
• MAIN
• FSK
• OCSL

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Ticker metrics change as markets and companies change, so always do your own research. The content in this podcast is based on personal experience and is for educational purposes, not financial advice. See full disclaimer here.

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Transcript

Welcome to roaming returns a podcast about generating a passive income through investing So that you don't have to wait to retirement to live your passions With interest rates about to drop one of our favorite sectors should be well despite what people think That sectors BDC's and no that doesn't mean binge drinking capital There are about 60 of these bad boys But which do you choose? We've compiled a list of five BDC's that most experts and successful investors would put in their top ten If you want some of the highest yielding companies in your portfolio, you gotta have at least one of these BDC's We own four of the five What's up y'all All right, guys We thought we would do something similar to what we did in the beginning of the year with going over the best of a category Well because I was talking about BDC's and REIT's so much last week with the interest rate cuts coming So I said we might as well address The elephant in the room is that they say elephant in the room. That's right. That's right phrase for you I don't know.
Okay. Sorry got sidetracked already and we have galloping Broncos Cats are feisty today. Um this week we're gonna do BDC's next week will be REIT's Because I think there's a lot of money to be made in the REITs Especially but the BDC is because they throw off a pretty high yield and they don't really have very much volatility when it comes to normal market conditions I like it tried to do some research in the last time that there was a Rate cut and the rate cut was so long ago that like a lot of the BDC's that I was researching didn't weren't around So well, so why is the reason the REIT's and BDC's are good during rate cuts? BDC's because they're actually going to be able to borrow money at a lower rate and they're still gonna be charging the money But it won't be at such a high interest rate, you know BDC like they'll borrow the money at 5.5 And I'll end it out at like 7.5 to 10% So obviously it's good that they're gonna be able to borrow less But they're also gonna be able to refinance their current debt at a lower rate making and giving them more money So their dividends should be safe.
I would think it would give I would Give them a bigger margin gap REITs are the ones that like maybe like I when I when I research them and I'll discuss it next week like it doesn't make Sense because they're able to actually get their debt at a lower rate But then the customer actually is able to pay a lower rate on their rent and their mortgages So but we'll just we'll discuss that next week. This week is all about BDC's BDC's my fave. I like them.
Oh, but basically the there We touched on this previously, but they're they provide financing to small and mid-sized businesses Small and mid-sized businesses can't just go to a bank and like look like Wells Fargo Like hey, can you lend me ten million dollars for my business? So they like they have to have another way to get funded and that's where BDC's came in That was a an act of Congress in the 80s. I forget. I mean if you don't Listen to the previous BDC we discussed it I don't remember what it I think it was a it was one of the way back in the beginning episodes but just a refresher that the what do you say the SEC basically made those Congress Congress Congress passed a bill that made BDC's a thing basically to help small businesses be able to actually get loans because all the loans criteria that existed like They were an outlier and couldn't actually get lending.
So it was an underserved market. That was a necessity and That's what they did. So they're actually pretty they're pretty lucrative thing If you don't have any in your portfolio, you should I mean if you listen to us I'm sure you have one in your portfolio or you've looked at a couple to put in your portfolio because I do Talk about them a lot.
But when you're looking at BDC's, there's a some some things you should be looking for the first is yield and Dividend stability the yield obviously the higher the better so long as it doesn't interfere with any of the other metrics dividend stability You want to make sure that they have a history of paying consistent dividends by consistent dividends We mean like so they pay 45 cents and they go to 40 cents That's not a big deal. Like if you have a normal dividend stock and it cut its dividend by like 12% That would be a huge deal but for BDC's they're kind of all over the place So they'll lower it and then they'll raise it and then they'll lower it and they'll raise it and they'll throw out a special dividend So they're kind of like they're more like a variable kind of some are and some are I guess we'll get into some are like that and some are really really consistent and Two of the ones that I talk about all the time are super consistent. They're actually dividend achievers now That means they have over 10 years of raising their dividend every year.
So basically what you're saying is if they faneggle their dividend payouts around don't freak out because that's kind of normal for BDC's Okay, unless you're in one that's like a dividend achiever We'll get to them and we'll discuss the dividend stability at that point The second thing to look at is the NAV net asset value I know you're should be familiar because the closing two funds have this and we always say like if you can get a Closing the fund to a discount to its NAV. That's a good deal That means generally it'll it'll close that gap say it's like a 10% discount. It'll close the gap closer to zero BDC's From what I can tell They're all over the damn place when it comes in now Like there's some that are like almost 200% their nav and there's others that are on trading under their nav you just want to Look at their historical NAV.
So say you find you find a BDC. That is normally like 125% of its NAV and historically it's at 110% of its NAV. Well, then you can see it.
Well, that's 15% overvalued Whereas if it was off say it was 125 and it's normally 150. Well, then you can see that it's 25% undervalued This is the one like this is one criteria where you like looking at the historical Context is helpful. I when you when we did the the thing where we were drawn on the screen with closing the funds a Kind of touched on that like you go in and look at the historical nav You have to do that with BDC's as well to make sure that you're getting a pretty pretty decent deal so basically you have that what they consider the nav is the General accepted par value or like datum point what it is It's not accurate.
She has a whole lot like I have a group of loans and say they'll have like two billion dollars in loans They'll go in there and look at their nest asset value to make sure and if it comes up two billion dollars in loans And but the stock like the the stock is trading it like it has four billion dollars in loans Well, then that's not necessarily a good thing That's what I'm trying to put this into like layman's terms of like concepts Practicality like I don't really care about the semantics, but in practical application Basically, what's happening is whatever that NAV number is a lot of people see a NAV and they just assume it's a par number And if it's below Below the NAV or above the NAV that it's a goodbye or overvalued but you have to look at historical because Like you're that's how you basically get that safety margin in like if you don't realize that this thing's always Overvalued and then you never buy in will you never make money? So like a discount is it's like a different datum point I'm probably like butchering the shit out of this, but I hope that makes sense for me when I'm Researching BDC's the NAV is probably the last thing I look at I'm more concerned with historical performance debt levels leverage That they use dividend stability profit margins and their price to earnings and versus historical price earnings versus the Sector the what is a capital market sector as a whole? I think that's more important than the NAV because BDC's They're like special the PDC's and Reeves kind of do the same thing like where they do like the NAV is kind of like if you don't do A historical deep dive on the NAV and the NAV price literally is worthless Yeah, you really need a historic and you can't compare like you can't compare BDC a with a NAV of 1.20 I need 125% versus BDC be that has a NAV of say 89% like you can't compare those Generally because it's again. It's usually BDC's like company specific like they have a historical NAV Yeah, it's not like bonds where your par is zero. Yes It's not like that or it's not like preferreds where your par is 25 and if it's below 25 It's a good deal.
No matter what the company is. You kind of have to do a deeper dive into BDC's That's why NAV is not that important to me But it is a factor that people look at and it does help you get things Undervalued if you know how to use it, right? right, then the third thing to look at when you're looking at BDC's is the portfolio quality if you if you're in a if you're in your brokerage and You can see that they have two billion dollars in loans if you like and I know in Schwab But I don't know about Fidelity or Wells Fargo or no, but in Schwab you can actually click on A link and they'll take you to the website of the BBC you're on and then you can go in there and you can look At the look at the portfolio what we mean by portfolio quality is are you if they taken on higher? Quality loans like BBB or higher. That's good If they're taking on a bunch of see like see quality loans that's something to like a red flag if you're not familiar like there's a general Pardoning a general thing or like they're a I don't know if it's a or a plus or a a whatever a is good B is good anything below BBB minus just consider junk bonds and it's the same with loans like it'll be the year They're learning to junk companies.
So like if you if you find it there in the BBB or higher, that's generally quality So for all y'all who have a credit score That's why certain credit scores are coveted it's because you actually become a AAA or a B type lender or borrower for a bank if your credit score is like below where they consider should be you become higher risk and that's essentially the exact same thing with what we're talking about with portfolio quality and the AAA BBB AB minus whatever the heck sounds like blood types. Yeah The fourth thing to look at would be a leverage and debt levels I mentioned that a couple minutes ago Just like in funds whenever they like they're running like a 30% leverage BDC's are notorious for having high higher debt and higher leverage So you just want to like if they're leveraging more than their portfolio is worth That's a like a that's a that's bad. Like say they have a loan portfolio of 2 billion there their leverage is like 4 billion Well, that's like that could be considered a red flag because they're leveraging more than they actually Have and if you've ever traded on margin and you trade Oh, yeah, how bad do you do more than your portfolio is worth and you're forced to sell? Well, basically you're you're just just decimating your portfolio and that's the same with a loan from a BDC like their loan portfolio and debt levels Again reach BDC's they're gonna have higher debt like if you're looking at regular dividend stocks their debt levels like minuscule But like BDC's the whole like monster of their operation is based on debt So it's kind of inherent.
Yeah, they have higher levels of it. And then the last thing that I Buy a group like I actually really agree with this what the experts look at is historical performance what we mean by historical performance is for me personally like look at 2008 or look at 2020 when we were in a quote bear market How did the BDC perform whenever the we were in a bad economic condition? That's to me is what I mean by historical performance other people look at like a little look at like a five-year period I do look at the five-year period but I'll explain it here in a minute Why I look at the five-year period has nothing to do with like the share price or any of that. It's the dividend growth Yeah It's making sure that they're consistent or they've figured out how to finagle their other stuff to get through like the down times You want to know that they're a good managing company if they freakin sink when the markets or when like times get tough that's not a great company to invest in and the only reason I would recommend looking at when it's a Negative economic period is because we're going to have one.
It's like it's like there's a few guarantees in life One of them is that we're actually going to go into a recession at some point. Yeah, that's just like so you make sure you're in something that historically has performed well in other recessions because when we go into a recession and say you're in a BDC that's shit, well once we start going into a recession you're going to have to sell your shares because you know they're going to drop like 75%. So those are the little things that you should look at when you're thinking about investing in BDCs. So now we're going to discuss five.
I looked, I pulled up like the best BDCs and I went through like numerous different lists and I came up with five that are mainly like if there's a top 10, these five are in the top 10. If there's a top five, at least three of these are in the top five. These are like well regarded and experts love them.
And we love them. So the first one and we're in four or five of them like right currently we are currently invested in four or five of them. So maybe I do know what I'm doing, I don't know.
The first is Aries Capital Corporation, ARCC. I know we've talked about this one. It's the largest BDC.
They say it's known for a strong management team but it has a solid dividend yield and it has a decent history. The second is Main Street Capital which I talk about all the time. If you're in an income portfolio, Main Street Capital should be part of your income portfolio.
They are consistent dividends. They're a dividend achiever. They've raised their dividend 14 years in a row.
They focus on lower middle market companies and their performance is awesome historically. Again, historical awesomeness is no guarantee of future awesomeness. It's usually a strong indicator.
C'est la vie. The third one is another one that I've discussed multiple times. It's Hercules Capital, HTGC.
They do debt and equity for high growth companies in the technology and life sciences. What we mean by high growth is to say there's a company that was worth $10 million and it's worth $50 million. Well, Hercules will actually prefer companies that are growing at a ridiculous pace.
Ridiculous rate. As opposed to ones that are doing say a utility. They would have invested in NVIDIA back in the beginning probably, right? Utility that's growing 3% a year.
They're not really interested in giving money to those people. The fourth one is Fisker Capital, FSK. This is another one they say has an awesome management team.
I don't know, but I like them because they have a very diversified portfolio. They invest in a little bit of everything. The fifth one is Oak Tree Specialty Lending Corporation, OCSL.
Again, this one's kind of a jack of all trades. They have exposure to a lot of different sectors, so they kind of just lend to whoever. Those are the five that I found the most consistent, most of the list of best BDCs.
Now we're going to go into trying to make it apples to apples when comparing them. I ran a few metrics that I've used for all of them. It's cool.
ARCC is currently as of, what the hell day is it? 9-1, 9-2, what day is it? As of yesterday. Not yet, whatever, is trading for $21.08. It's NAV price per share as of 6-30. It's a quarterly thing.
I guess they reported the last quarter ended on 6-30. As of 6-30, their NAV price was $19.61, so they're a little bit above their NAV price. Historically, they're always been a little bit above to a lot above.
Historically, they are about where they should be. I think they're fair value if maybe 5% undervalued in that 0% to 5% range. They have a current yield of 9.11%, which is, again, if you do dividend stock investing, you're getting 2% to 4%, so it's double what you normally get.
Their earnings per share as of 6-30 the last quarter was $0.61, and their current dividend per share was $0.48, meaning they had a 78.69% coverage ratio. Generally, in BDCs, the lower the coverage rate, the better, but you can go as high as 95% because they have that stupid where they have to distribute 90% of their capital to investors, so their coverage rates are going to be higher than most other investments that you're used to. It's just the nature of the beast.
When I evaluate investments, if you didn't watch the video, I always look at the forward PE. I'm not concerned with the current PE. The current PE was last week.
I'm more interested in the forward PE, which is basically how much are they going to be making so it's price per earnings. That's what the PE stands for, so how much are they going to be making for each stock. They have a forward EPS, but that's very difficult too.
You mean each share? Yeah, each share, but they have a forward PE of 8.79%, which you'll notice if you've looked at the overall market, the PE currently is like 27-something, so that seems low. In fact, it is low, but the capital market is actually lower priced earnings than the overall market. They have a 59.76% profit margin.
That's one of the big numbers. Is that good? Yes. One of the big numbers I look at is profit margin.
What the profit margin is meaning is after their revenue, after their payouts is 59%, the higher that is, the better that means they can afford their dividend. With a higher profit margin, there's generally a pretty good probability of a dividend increase. Yeah, I figured that part.
If they have extra money, they're going to give us extra money. The two important percentages when analyzing BDCs, REITs, pretty much anything would be their coverage ratio and their profit margin. If their coverage ratio is 100% and their profit margin is 100%, that means they're probably not going to raise a dividend, but they can actually afford to keep paying the same dividend.
If their coverage ratio is 80% and their profit margin is at 30%, they may give you a dividend increase, but that profit margin is a key percentage because the higher that is, the higher probability of a dividend increase in the future. When looking at the historical dividend of ARCC, they don't have a streak really going on. I think it's like two years they've raised the dividend, but in the last five years, they've raised their dividends four times and their five-year dividend growth average is 5.26 annualized.
That means if they've only raised it four times in five years, but it's 5.26 per year, that means they give you some pretty lofty dividend increases. Yeah, that's nice. So love them.
It's not a retirement account because this is probably going to be her mom's retirement account, probably just going to be a keep it for as long as it's profitable type thing. Just let it keep compounding, but it's really good. Second one, Hercules Capital.
Everyone should know about Hercules Capital. I do discuss them probably three times a month. If you're new to the channel, it shouldn't be roaming returns, it should be Hercules Capital for the win, but c'est la vie.
Hercules Capital is trading at 19.17 currently and it has a NAV per share price as of 6.30 again of 11.43, but then this is one of those things you looked at. This is why I look at the NAV share price last. The NAV share price, you're like, oh, that's almost 100% or 80% over value compared to its NAV, but Hercules Capital is historically between 70 and 120% above their NAV price.
It's just, they are. I guess because everyone else figured out they're pretty cool too. I don't know.
They were higher to their earnings, I think two weeks ago they were at like 22. So it came down a lot. So it might be a buying opportunity because it did take a pretty big dip.
It went down by like 12 to 15%. Their current yield is 10.02%. So again, if you look at dividend aristocrats, dividend achievers, dividend contenders, you're generally looking at like 4%. So you're getting quite a high return.
Was there any news that made a drop or was that the news that I saw or I heard about that was like overvalued or smashed its earnings and people were worried it was overvalued? They're worried it was overvalued. I'm pretty sure it was a lot of profit taking because Hercules Capital was up of, I want to say 40% for 2024, maybe 50%. That logically makes a lot of sense because it kept going up.
It's like, when do you come back down to earth? Earnings per share, the last earnings report for Hercules was 51 cents and the current dividends per share was 48 cents, meaning they had a 94.12 coverage ratio. That's kind of almost to my cut out, 95%. I know for the van lifers that we talked to that are on YouTube, I told them to actually turn the drip off on Hercules because it was overvalued and its coverage ratio was pretty high.
So they're actually collecting cash and like a lot of cash. Actually, they have I think $11,000 in Hercules Capital. So they got a pretty good cash payment.
The forward PE of Hercules Capital is 9.39. So it's higher than ARCC. But generally the price to earnings of Hercules Capital is a little bit higher because it's a sought after investment. It only has a 57.82% profit margin, which is still hell of goods.
It's only 2% different than the other one. And Hercules has increased its dividend every year since 2010, making it a dividend achievers at 14 years right now. Five years, the dividend growth rate is 7.3, which is ridiculous for just a whatever.
A lot of people avoid BDCs because they're afraid of them, the risk or whatever, but 7.3 per year. And Hercules Capital will throw off a special dividend. I think in 2023, we got three special dividends.
I know we've had one special dividend in 2024 already. Three? Jesus. They throw off a special dividend all the time.
That's probably why their coverage ratio is so high. Because I think their dividend is 40, I want to say 40 cents or 42 cents, and they threw off a six cent special dividend, making it 48. Nice.
But they're really good. If you don't like Main Street, because Main Street Capital costs so much, Hercules Capital should be like, you should have Main or Hercules, at the bare minimum, one of them in your portfolio. If you don't like Main, because it does cost about $50 a share, you should have Hercules Capital in your portfolio.
It's just the nature of the beast. If you want to invest high yield investing for income, you need to have things that actually have high yields. You're going to have some risk associated with it, but that's where if you do the due diligence, and you look at the financial metrics, and you look at the historical NAV price, and the historical debt, and everything like that, if you look at it... As long as you do your due diligence, and you mitigate risk, you'll be fine.
If you read about most of the big investors, or the really successful ones, almost every one of them talks about asymmetrical risk to reward. That's taking on a fair amount of risk, but the rewards are five to one. That's essentially what BDCs are in my book.
The good ones, anyway. We've held Hercules Capital since July 5th of 2022. With dividends, and special dividends included, we are actually up 104% in a little over two years.
That is fantastic. We originally put in $3,700, and we're up to $6,700, even with the pullback. You can see why I'm a fan of Hercules Capital.
It's really given some strong returns, even during a high volatility, and high rate environment. Kudos, Hercules. The third one, this is one that you should know about.
If you don't know about it, I would love to know what rock you're hiding under. Selective hearing. Well, there's a few high yield, quote high yield.
It's not really that high a yield. It's only 5.83%, but there's a couple of high yield investments. The O Realty is one you hear about.
Main Street Capital. Main Street Capital. There's a couple that you hear about from pretty much anyone that's an expert, quote unquote.
Main Street's trading at 49.40% currently. Its NAV per share is 29.80%. This one is damn near, it's like 1.82% above its NAV. It's like 82% above its NAV price, but historically, this one can go as high as like 212%.
Holy shit. This is because it's super popular and people trust it. They trust the management team and it has really good- This one's actually undervalued compared to the historical? No, this one's still a little overvalued.
Oh, okay. The way you said that made me think that it was actually trading below the historical. To me, it's overvalued.
Again, this is one that we have turned the drip off of. It pays a monthly dividend. That's why it's a quality company that pays a monthly dividend and so people just love it.
And they're like rehashed. When these things become overvalued, we don't sell the stock because it's still paying dividends. We just turn the drip off so that it's not reinvesting at a higher price, which is then lowering our cost of the average share price.
We'll take that into dry powder or cash and then we put it in something that's undervalued. It's kind of like a more manual, more active play in the portfolio, but that's honestly how we increase the earnings so hardcore. I think everybody should do that.
I'm a complete sidebar, but if you're in dividend stocks and say you're in Coke and Coke's trading at like $100 per share, hypothetically. Well, Coke's generally between the $40 to $60 range, so if it's above that, you know it's overvalued. So what's the point of actually reinvesting at $100? You're not going to get crap in share quantity and that's just bad.
That's just bad money management. If you can go to, say, Giant or King Soopers and you can get a gallon of milk for $6, why would you go there when you can go to another place, even a convenience store, and get it for $4? It's the same concept when it comes to why would you leave your drip on. I understand a lot of people don't want to be in their portfolio a lot, but at the same time, you have to use common sense.
Why would you pay? Well, I think for the individual, it's finding the best balance between how often or how active you want to be and then how much you really want to get out of this. If you want to get more out of this, you need to increase the activity level or at least the awareness level. So I said that's why we've said previously that you should at least check into your portfolio once a quarter.
Yeah. To make sure, first of all, from the quantity, the position size, to make sure that's below your threshold, whether it be 5%, 6%, 4%, whatever your threshold is. If something's at 8% and you want a 4%, well, you're going to have to sell some shares to rebalance.
You want to make sure that there's nothing- Or at the very least, turn the drip off. There's nothing bad's happened. So you should have a general idea of what you're in and you have a general idea of what a good valuation is like share price.
If you don't, then you're kind of just flying blind and that's not any way to invest. Well, I just think this isn't really the strategy for you. But this is like for people who really want to freaking maximize their earnings so we can get the hell out of the jobs we hate and into the life we love.
I don't know about you, but I got like 400 hobbies on my to-do list and that's what I want to be doing. So Main Street, like I said, current yield is 5.83%. So not near as high as most BDCs, but still pretty good. Still above the average.
Here's the reason why people are willing to overpay for it. The earnings per share came in at $1.19 in their current dividend. If you add up the three months with 72 cents, meaning they only had a 60.5% coverage ratio, which is really low for something that has to pay out 90% of their money to their shareholders.
So it means the management team knows what the hell they're doing. The for PE of Main Street is 11.98%. And here's the second number. I remember I said there's two percentages to look at when you're analyzing basically high yield investments.
Drum roll. Well, the profit margin for Main Street Capital is 87.58%. That is like ridiculous. So you know they're going to keep increasing their dividend.
So people are willing to overpay because they're going to get dividend increases. And I'm okay turning the drip off on something like this when people are willing to overpay for it. I mean, it sucks because I'd rather obviously accumulate more shares, but I don't want to accumulate more shares at twice the cost.
Again, it's a personal trade-off, and that's something that we do. And it seems to be working. So Main Street Capital is actually another dividend achiever.
It's increased its dividend every year since 2009. Well, I'd hope so with a freaking goddamn profit margin like that. But you'll see the difference between Hercules and Main here.
Hercules was a 7.3% annualized. Main Street Capital is at a 5.4% annualized dividend growth in the last five years. So they have more money to actually increase the dividend, but they're actually really conservative about it.
So it's only growing at like 5% per year, which isn't anything to sneeze at, but it's not as good as 7.3%. Now, Main Street Capital is another one. The last time we got into this, I actually did sell all of this at one point. Because it got too high? I don't remember.
Probably I'll say that. Well, that would be helpful. Your short-term memory or whatever, long-term memory is just terrible.
Main Street Capital we got into in 12-6 is 2023, the most recent time we got into it. And we are up 24% in eight months. So you can make a shit ton of money and have a good capital appreciation in BDCs if you know what to look for and what to do.
Like I said, 103 in Hercules. We are up 24% in Main Street Capital. ARCC, I forgot to mention ARCC.
We're up a pretty good amount in that one too. So do that one now. ARCC we've held since September of 2023 in the retirement account.
We're up 19%. We don't have as much of an appreciation in that one, but that's still hella good. Nothing to sneeze at there.
Considering the market's only up like 11% or 12%. Right, right. So like I was saying, Hercules Capital, Main Street, you need to have one, if not both of those in an income portfolio.
They generate really good dividends. And for whatever reason, these two perform quite well with your capital appreciation. So I don't know how I was lucky enough or skilled enough or both to find them at the price I did and have really good returns.
That's because you're a freaking wizard. We're just going to call you that. And the fourth one on the list is, we've been in this one for a little while too, I'll bring it up here in a minute, is Fisker Capital, FSK.
Now this is one of the interesting ones, and we'll discuss why here in a minute. It's trading at 2023, but its NAV per share price is $23.95. So it's actually trading well below its NAV per share price, which- And that's not even with the historical. Historically, it's all over the place, but generally it should be about NAV.
So it's trading about, what is that? Five, so it's 15% undervalued, thereabouts. So this one has a good possibility of going up to appreciating your capital 15%. Just remember that.
Okay. Current yield of Fisker is 13.84, which is, you know, hella high. If you get that on top of that price appreciation, holy crap.
Earnings, EPS, most recent earnings report was up 75 cents, and the current dividend per share was 70, meaning it has a 93.33 coverage ratio. Again, that coverage ratio is a little bit elevated like Hercules Capital was because Fisker throws off special dividends, I think, three times a year. I know we've been in it and we've got a special dividend every time.
So it might be every time, I don't know. They have a base rate of 64 cents per share, and then they tack on six cents special dividend when they have the cash. So that's where the 70 cents came from.
Seems to be like it's all the time then. Yeah. So that coverage ratio is a bit elevated.
The 4PE is only 7.08. It is one of the lower priced earnings BDCs. It only has a 35.46% profit margin. So if you looked at just the two numbers, the 93.33 coverage ratio with the 35.46 profit margin, you'd be like, nah.
And then it's increased its dividends 10 times in the past five years, but the dividend growth is negative 1.87 annualized, which means this thing is all over the place dividend wise. I don't know how they came up with the negative 1.87. When I went back and looked, it actually had increased from 57 to 64 in the last five years, but there have been times where they paid a 40 cent one with a 20 cent special dividend. So maybe that's how they got that number.
I would imagine it has something to do with the fact that their stuff's all over the place. And I'm imagining what they do is they probably pay out based on their earnings, revenue or something along those lines. And that just makes it fluctuate.
And then if you try to do calculations, it depends where your base point is, if you understand like just math. And so I think that number might be kind of irrelevant for this one, if that does have the variability that it does. Yeah, it's been all over the place, but they gave me a special dividend.
So I'm cool with that. And our results, I think, prove that this one isn't a bad one. Now, we've only been in this one for three months.
Well, I held it previously and we made about 12% in a 12 month period. So we're making 1% per month. The last time I bought it was in 5-23 of 2024.
And we're currently up 5% is all in this one. In three months? Yeah. So if you extrapolate that out to a year, that's going to look at what, about 20%? Yeah.
Better than last time, apparently. But I really like Fisker Capital for a multitude of reasons. The first being that it's undervalued.
The second being it has a high yield. The third is that it throws off a special dividend. So I'm okay.
If the growth rate is whatever, if that's the accurate number, if the growth rate is stagnant, I'm okay with getting 13% without a dividend increase, because that's a really high yield. In fact, it's the highest yield of the five that we're discussing today. I'm not saying to go out and buy Fisker Capital, but I'm going to take a look at it.
It's undervalued. And the last one is OCSL. This is one that if you follow Tim Fallon, the Dividend Hunter, he's pretty high on this one.
I'm not, but he is. So I'll explain why I'm not in a second, and why he is in a second, and we'll just think we have different points of view on this one. Well, this one came up as one of the most whatever to get in from all the research you did.
So I imagine more people than just him like it. Currently, it's at 1713, and its NAV per share is 1819. And this one generally trades a little bit above its NAV per share.
So this one's probably about 10% undervalued, not as much as Fisker Capital, but still undervalued. It has a current yield of 12.84%, which is cool. Not as cool as the 13, but it's cool.
EPS is 55 cents in this latest earnings report, and its current dividends per share is 55 cents, meaning that it has 100% coverage ratio. That's a bit high for me. Like I said, 95 is as high as I'm willing to go, generally.
Yeah, like you like some wiggle room. What happens with this one, though, is it looks like they just take everything all the time and pay out 100%. I could see your hesitancy.
That might be a questionable operating strategy. So I don't like the high coverage rate, but other investors do because they're like, it's a BDC, it's supposed to have a high coverage rate, which is true, but you can also find ones that have better coverage ratios. But even, look, the next percent, the 17.21 profit margin, that's low.
It's lower than other ones, isn't it? Yeah, that's low. So the forward PE is 7.69. So it has a low forward PE, so it is a little undervalued. It's increased its dividend 11 times in the last five years, and its five-year growth rate is 15% annualized.
Again, that's because the more money they make, the more they distribute, because I think they like to stick around that 100% coverage ratio would be my guess. I mean, I guess consistency is key, but I don't like the fact that it's 100% coverage and then the profit margins as low as it is. That to me sets up for if we go into a recession, that might be bad juju.
What they'll do is they'll just cut out their special, like I guess they'll give special dividends to make that 100% ratio. So I think the actual dividend is, I want to say 49 cents, and they tack on six cents extra every quarter to come up to that 100% coverage ratio for the EPS. Yeah, that makes sense.
So the first thing that'll happen if the shit hits the fan is they're going to cut the special dividend. Cut the specials. And then they'll probably lower the other one.
Well, they'll lower it down to their coverage rate, which again, if you're hoping for consistency through whatever, it's not going to happen. So if you get into that one, just expect that, I would assume. So what to take from this list is, if you want a good valued BDC, generally you're not going to have dividend consistency.
You're not going to have an increase every year. You're going to have not a variable, but it's going to bounce around like with the special dividend, without the special dividend. So the best value ones on this list were FSK and OCSL.
Neither one of them raised their dividend every year. And if you're actually depending on the income as a retiree or someone that's actually traveling with your dividends, you kind of need a consistent, reliable money amount coming in generally. So also that Hercules Capital and Main Street Capital appear to be overvalued when compared to other BDCs on this list.
But if you look at the capital market, which is the sector, I think it's the sector that BDCs are in, the average price to earnings is 2230. So like every one of these is undervalued compared to all their peers. Yeah, and that valuation's a big one that I care about.
So I'm actually willing to take a higher priced BDC that seems to be overvalued for the consistency. I love that Main Street Capital and Hercules Capital pay me dividends and special dividends like every month or double. And Main Street every month, Hercules every quarter, but every quarter I get a special dividend for Hercules Capital.
Well, it's actually funny because I've heard you say that I didn't like the performance on that one, blah, blah, blah, blah, whatever. But it's, again, there's what's on paper, these numbers, like we're looking at it. What we're seeing in our portfolio, Main and HTGC have been amazing freaking outputters, I think, based on the numbers you got going on.
So again, when I was discussing the dividend coverage ratio, I like it to be below 95 because if you've been in ones that are higher and there's a bad quarter, the first thing that will happen with the ones that have a higher coverage rate is they will cut the dividend or they'll cut the special dividend or they'll generally cut both. They will hamper your consistency of payout, which is exactly what we want to avoid. So that is why I don't like the higher coverage rate.
And as always, you should do your own due diligence, do your own research to verify that my data is accurate before you actually invest in these and make sure it's aligned with your financial goals and your risk tolerance. Everybody's going to be a little bit different. This is just what we do.
Like Fisker Capital is kind of like the share prices all over the place, but I'm okay with that because I'm getting like about 14% yield. So it is what it is. That is the five that I came up with for BDCs.
Next week, we're going to do REITs. Next week will be REITs, and that one's a bit harder to do. That's why I didn't do that one first.
Well, you got a whole week. Get on it. Yeah, but if you have any other ones that I may have missed when doing the research, for sure, drop an email.
We can discuss it. I have no problem saying, oh, that's a good one. There are like 60 of these or whatever there are.
Yeah, if there's one you want us to review, you want Tim to scan over and give his input, feedback, whatever, his perspective, feel free. Shoot us an email. He'll get back to you.
But you should have at least two BDCs funding your income in your income portfolio. And with interest rate cuts coming, like a lot of people think BDCs are not going to perform well, but I actually think they're going to perform well because they have so much profit margin built in from the high rate era that they're going to perform. They'll be just fine.
It's not going to be detrimental like people think it's going to be. So we will see that firsthand when the rates actually start getting cut. And that is that.
Now we're off to do other fun stuff. Yep, back to the condo. So we'll see you guys next week.
Hope you enjoyed this.