Interest rates are headed higher, and despite chatter that the Federal Reserve efforts may slow in September, that will depend on when inflation decides to pause. Based on current food and fuel prices, that does not look to be anytime soon. Investors can count on at least a 50-basis-point increase next month and, depending on the data, it could be as high as 75 basis points.
So what are balanced growth and income investors to do? The potential for capital appreciation on low coupon bonds is negligible, and with the market possibly primed for a continued big sell-off, risky high-yield or leveraged funds do not make any sense for those with low risk tolerance. What does make sense is looking at the business development stocks that pay outsized dividends and offer growth potential.
Commercial finance stocks are also known as business development companies (BDCs) and are organizations that invest in small and medium-sized companies, as well as distressed companies. A BDC helps firms grow in the initial stages of their development. With distressed businesses, the BDC helps the companies regain sound financial footing.
The analysts at Jefferies are very positive on six top BDCs and had this to say about the sector’s solid second quarter and prospects for the rest of the year:
While volatility picked up broadly in the second quarter, BDC fundamentals remain fairly stable and strong in terms of portfolio growth, credit and yield expansion. Net Asset Values declined on unrealized depreciation while credit remains in focus with the evolving market backdrop. While we remain selective, we consider six top companies as quality picks and with growing macro-uncertainty on the heels of robust industry growth, we remain selective on the space but nonetheless consider some high-quality BDCs as attractive investments.
It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Ares Capital
This is a favorite BDC across Wall Street. Ares Capital Corp. (NASDAQ: ARCC) is a leading specialty finance company that provides one-stop debt and equity financing solutions to U.S. middle-market companies, venture capital-backed businesses and power-generation projects.
It originates and invests in senior secured loans, mezzanine debt and, to a lesser extent, equity investments through its national direct origination platform. The company’s investment objective is to generate both current income and capital appreciation through debt and equity investments primarily in private companies.
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