With a number of large-cap companies putting out disappointing second-quarter results, as investors we need to look to different industries and sectors for some bright spots. The 2022 recession will affect companies in diverse business areas a lot differently compared to what we saw during the pandemic shutdown of early 2020.
Let’s take a look at how this recession will affect the giant mega-cap companies that most investors follow, and smaller companies operating in specific business niches.
The difference will show you where to put your money next…
It would be very difficult, if not impossible, for huge, publicly traded companies like Apple, Walmart, Google, and Amazon not to have their business results track the ebb and flow of the broad economy. I see these large companies as being the broader economy. If the economy slows or enters recession, their business will likely follow.
When we look at smaller companies, the individual business may operate in areas that are not directly affected by the broader economy, or may even be countercyclical. For example, vehicle repo work probably gets very busy in a recession.
Looking more towards investing, apartment owners the in the Sunbelt benefit from falling home purchase affordability and the general migration to warmer, lower-tax states. Another example would be a successful animal hospital. I have an older dog who is unwell, and therefore I spend a lot of money at the local establishment. And it is always busy!
My point is that there is a tremendous difference when analyzing mega-cap stocks compared to the investment prospects of smaller companies.
Business Development Company (BDC) stocks give us a double portion of investing goodness into smaller companies that are doing well in a tough economy.
BDCs provide debt and equity financing to their small to mid-sized corporate clients. By law, they operate low-leverage businesses, so rising interest rates don’t add a lot to expenses. On the flip side, the loans made to BDC client companies are almost 100% adjustable rate. As a result, rising interest rates positively increase BDC interest rate spreads.
The client companies of a BDC are, by definition, smaller businesses with the flexibility to quickly change to meet current economic conditions. The BDC will receive the loan payments as long as a client company stays in business. Many BDCs also take some equity in their clients, so when the clients thrive, the BDCs share in the gains.
My thesis was proven out by two dividend announcements that hit my desk on the same day last week.
With a $9.5 billion market cap, Ares Capital Corp (ARCC) is the largest of the publicly traded BDCs. Last week the company announced it had increased its dividend by 2.4%, to $0.43 per share. The boost is well above the 1.6% five-year average annual increase. ARCC yields just under 9.0%.
In February, Hercules Capital Inc. (HTGC) announced a $0.15 per quarter supplemental dividend on top of the $0.33 regular dividend to be paid for all four quarters of 2022. Last week Hercules increased its regular dividend by 6.1%, to $0.35 per share. HTGC yields 9.6% based on the regular dividend.
Despite the slowing economy, these two BDCs and their portfolio companies are doing fine. During the recent market decline, I told my Monthly Dividend Multiplier subscribers to load up on my recommended BDC stocks. It’s hard to beat growing dividends combined with excellent current yields. See for yourself how quickly this can transform your portfolio – just click here.
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