Why We Call It "The Sweet Spot"
Tier 3 offers the highest fundamental yields available. Unlike Tier 4 (Options) which manufactures yield, Tier 3 yields come from actual profits paid by real borrowers and tenants.
However, these assets are interest rate sensitive.
BDCs (The Lenders)
They lend to companies too big for a bank but too small for an IPO.
- MAIN (Main Street Capital): The "Blue Chip" BDC. Pays monthly.
- ARCC (Ares Capital): The largest BDC by market cap.
REITs (The Landlords)
They own physical real estate and collect rent checks.
- O (Realty Income): "The Monthly Dividend Company."
- VICI: Owns Las Vegas casinos (Caesars, MGM).
- PLD: Industrial warehouses (Amazon is a tenant).
The Risk: Rates & Recessions
Interest Rates: When Fed rates rise, borrowing gets expensive. BDCs usually benefit (floating rate loans), but REITs suffer (higher debt costs).
Recessions: If the economy tanks, tenants stop paying rent and borrowers default. Tier 3 falls harder than Tier 2 in a crash.
The Golden Rule of Tier 3
"Buy the manager, not the yield."
In this tier, management quality is everything. A bad BDC manager will lend to risky companies to juice the yield, eventually leading to loan defaults and a dividend cut. Stick to the "Blue Chips" (MAIN, O, ARCC, VICI) until you are an expert.