Main Street Capital Corporation (MAIN), Prospect Capital Corporation (PSEC): Two High-Yield Alternatives to BDC Stocks

Prospect’s common stock trades at a price roughly equal to book value, giving it a yield of 12%. Since the financial crisis, Prospect has regularly increased its monthly dividend while reporting solid performance for its underlying portfolio. The company hasn’t had a single non-performing loan in nearly six years.

It’s tough to judge a business development company in the current market climate. The last six years have been extraordinarily favorable to high-risk lending, amid lending liquidity and a recovering economy. But what if you wanted a less risky investment than Prospect itself?

The 7% alternative
Playing it safer with Prospect Capital Corporation (NASDAQ:PSEC) is as easy as buying its senior notes, which trade as Prospect Capital Corporation.

The notes won’t be redeemed until 2022, and they yield 6.95% at the current price of $25 per note.

The 6.95% notes also have preference to earnings before shareholders, so poor performance from the underlying portfolio won’t immediately affect the interest payments to noteholders.

Safety does come at a price: The notes yield 5 percentage points less than the equity. But that trade-off may be more than fair for investors who are focused first on the safety of their investment capital. Prospect Capital Corporation (NASDAQ:PSEC)’s earnings would have to turn negative, and book value would have to take substantial writedowns before note-holders felt the pinch.

The Foolish bottom line
Investors shouldn’t limit themselves to only stock or only debt. Investments are only as good as their alternatives.

If you’re unhappy with the low dividend yields available in blue-chip stocks, but too risk-averse to invest in BDCs, BDC notes offer an interesting midpoint between risk and reward that may be suitable for your income portfolio.

The article 2 High-Yield Alternatives to BDC Stocks originally appeared on Fool.com and is written by Jordan Wathen.

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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