A Realistic Look at Business Development Companies for Retirees
If you’ve been exploring ways to earn reliable income in retirement, you’ve probably come across Business Development Companies, or BDCs. Known for their attractive yields—often 8% to 10% or more—BDCs can seem like the perfect solution for retirees seeking steady monthly or quarterly income.
But are BDCs safe? The answer isn’t a simple yes or no. Like any investment, BDCs come with both rewards and risks.The key is understanding how they work, what to watch out for, and how to invest smartly.
This post breaks it all down—credit risk, leverage, economic cycles, and more—and is adapted from my book 9% Retirement Paycheck: How to Generate Steady, Worry-Free Income for Life, available at Amazon.com in paperback and eBook formats.
💼 What Is a BDC?
A Business Development Company is a type of investment firm that lends money to small and mid-sized private businesses—often ones that are too small or too risky for traditional banks.
In return, BDCs collect high interest payments, which they are required to distribute to shareholders. That’s why they often pay such high yields.
You can invest in BDCs by buying shares on the stock market, just like any other company.
💰 The Rewards of BDCs
Before we dive into the risks, let’s quickly review why BDCs are so attractive—especially for retirees.
✅ High Income
Many BDCs offer dividend yields of 8% to 10% or more, significantly higher than most traditional stocks or bonds.
✅ Monthly or Quarterly Payouts
Most BDCs distribute income on a predictable schedule, which can help retirees budget and feel more financially secure.
✅ Diversification
BDC portfolios typically include loans to dozens or even hundreds of companies across multiple industries. That diversification helps reduce risk from any single borrower defaulting.
✅ Strong Historical Returns
Top-tier BDCs have produced solid long-term total returns, often outpacing the broader stock market when reinvested.
⚠️ The Risks of BDCs
That said, no investment offering double-digit yields is risk-free. Here are the three main risks to understand before investing in BDCs:
1. 📉 Credit Risk: What Happens If Borrowers Don’t Pay?
BDCs lend to companies that are often below investment grade. That means their borrowers may have:
- Inconsistent cash flow
- Limited access to other credit
- Higher chances of default during economic downturns
A spike in non-performing loans can hurt a BDC’s earnings and lead to dividend cuts.
How to stay safe:
- Choose BDCs with low non-accrual rates (loans not currently paying interest)
- Look for diversified loan portfolios, with broad industry exposure
- Favor BDCs that focus on secured lending (backed by collateral)
🛡️ Example:
Main Street Capital (MAIN) has maintained some of the lowest non-accrual levels in the industry, thanks to conservative underwriting and hands-on portfolio management.
2. ⚖️ Leverage: The Double-Edged Sword
Most BDCs use leverage—borrowing money to make more loans and amplify returns. This can boost income when times are good, but magnifies losses when the economy weakens.
Too much leverage = higher risk if borrowers start defaulting or if interest rates spike.
How to stay safe:
- Choose BDCs with moderate leverage ratios
- Review how much of their debt is fixed vs. floating rate
- Look for BDCs that manage leverage conservatively
🛡️ Example:
Ares Capital (ARCC), the largest BDC in the U.S., uses leverage strategically and maintains strong credit ratings from agencies.
3. 📉 Economic Cycles: Boom or Bust
Because BDCs earn money from lending to businesses, they are cyclical by nature. When the economy slows down:
- Small businesses may cut back or fail
- Loan defaults can rise
- Investor sentiment drops, pushing BDC share prices lower
Even the best-managed BDCs can see their stock prices fall during recessions, even if dividends are maintained.
How to stay safe:
- Don’t go “all in” on BDCs
- Include BDCs as part of a diversified retirement portfolio
- Focus on high-quality BDCs with proven resilience in past downturns
🧩 Additional Factors to Consider
🔍 Internal vs. External Management
- Internally managed BDCs (like MAIN) often have better alignment with shareholders and lower fees.
- Externally managed BDCs may have more conflicts of interest, as they’re run by third-party managers who collect performance fees.
📊 Net Asset Value (NAV) Stability
A well-run BDC tends to protect or grow its NAV over time. Falling NAV can be a sign of poor loan performance or mismanagement.
🏆 The “Safest” BDCs? What to Look For
When building a low-risk BDC portfolio, consider the following:
✔️ Low Non-Accrual Rates
Less than 2% is ideal.
✔️ Conservative Leverage
Debt-to-equity ratio under 1.25 is safer.
✔️ Internal Management
Usually means better cost control and alignment.
✔️ Track Record Through Recessions
Did the BDC cut its dividend in 2008 or 2020? How did it recover?
✔️ Diversified Lending Book
Hundreds of borrowers, with no outsized exposure to any one industry.
👴 Real-Life Example: George’s BDC Income Strategy
George, a 72-year-old retiree, wanted to generate extra income from his $200,000 IRA. He didn’t want wild price swings, but also wasn’t satisfied with 3–4% bond yields.
He allocated:
- 40% to Main Street Capital (MAIN)
- 40% to Ares Capital (ARCC)
- 20% to a BDCs ETF (BIZD) for broader exposure
This gave him an average yield near 9%, monthly and quarterly income, and diversification to spread out risk.
“It’s the first time in years I’ve had income I can count on,” George says. “And I don’t panic when the stock market dips.”
✅ Final Thoughts: Are BDCs Safe?
BDCs aren’t risk-free—but they aren’t reckless either.
They offer retirees a unique way to generate high, consistent income from the backbone of the economy—America’s small and mid-sized businesses.
The key is to:
- Understand the risks
- Choose wisely
- Stay diversified
- Focus on quality
When used correctly, BDCs can be a valuable component of a retirement income portfolio—especially for those seeking higher yields with manageable risk.
📘 This blog post is adapted from my book:
9% Retirement Paycheck: How to Generate Steady, Worry-Free Income for Life
Available now at Amazon.com in paperback and eBook formats.
Disclaimer: This post is for informational purposes only and does not constitute financial, investment, or tax advice. All investments involve risk. Past performance is not indicative of future results. Always consult with a licensed financial advisor before making investment decisions.