Diversify your retirement income without letting BDCs dominate your asset mix.
Business Development Companies (BDCs) can be powerful income-generating tools in a retirement portfolio. They typically pay attractive dividends—often in the 8% to 10% range—and give everyday investors access to private credit and small business lending opportunities that were once reserved for Wall Street insiders. But as with any high-yield investment, moderation is key.
In this post, we’ll show you how to add BDCs to your retirement portfolio the smart way—for steady income without taking on too much risk.
Why BDCs Are Popular with Retirees
BDCs invest in small to midsize private companies, often in the form of senior secured loans or convertible debt. In return, they collect interest payments and fees—income that gets passed along to shareholders as dividends. Because BDCs are required by law to distribute at least 90% of their income to shareholders, they often produce impressive yields.
Retirees like BDCs because:
- They provide monthly or quarterly income.
- They offer access to private credit markets.
- They help diversify away from traditional bonds and dividend stocks.
But while BDCs can provide stable income, they’re not without risk. Many BDCs lend to businesses that are unlisted, smaller, or have less predictable cash flow. That means their loan portfolios may be more sensitive to economic downturns.
The Risk of Letting BDCs Take Over Your Portfolio
Because BDCs can produce eye-catching income, it’s easy to get lured into allocating too much. But that can backfire. Here’s why:
- BDCs can be volatile. During market downturns, they tend to fall harder than traditional dividend stocks or bonds.
- Their income can fluctuate. If borrowers start missing payments or default, dividends can be cut.
- They’re sensitive to interest rates. Rising rates can increase income on floating-rate loans—but also pressure borrowers and increase default risk.
A good rule of thumb for most retirees is to limit BDC exposure to no more than 10% of your overall portfolio—just enough to enhance your income without putting your nest egg at undue risk.
3 Smart Ways to Add BDCs to Your Portfolio
Here are three ways to add BDC exposure safely and efficiently:
1. Use a BDC ETF like BIZD
VanEck BDC Income ETF (BIZD) spreads your money across a broad range of publicly traded BDCs, giving you instant diversification. It currently yields around 9%, and you don’t have to pick winners.
2. Choose top-quality individual BDCs
Look for BDCs with strong management teams, conservative underwriting, and consistent dividend histories. A few examples include:
- Main Street Capital (MAIN) – Known for its solid dividend and shareholder-friendly approach.
- Ares Capital Corporation (ARCC) – One of the largest and most diversified BDCs in the market.
- MidCap Financial Investment Corp. (MFIC) – Conservative, with a focus on senior secured loans.
3. Pair BDCs with more stable income investments
BDCs can work well alongside safer holdings like Treasury bonds, investment-grade bond funds, preferred stocks, or utilities. This helps balance the higher risk of BDCs while maintaining strong overall income.
Final Thoughts
BDCs can be a smart addition to your retirement income mix—but they should be treated like the “spice,” not the main ingredient. By limiting your exposure and pairing them with more conservative assets, you can enjoy the income they offer without taking on too much risk.
And remember: Just because a BDC pays a high dividend doesn’t mean it’s a good investment. Do your homework, diversify, and focus on quality.
Disclaimer: This post is for educational purposes only and does not constitute financial advice. Investing in BDCs involves risk, and past performance is not indicative of future results. Always consult a financial advisor before making investment decisions.
Adapted from the book: Invest Like a Banker: A Retiree’s Guide to Safe and Stable Income, available now on Amazon.com in paperback and eBook formats.