Generous Yields & Large Capital Gains? It's as Easy as BDC!


Mike Larson Image Mike Larson Editor, High Yield Investing

Business Development Companies receive generous yields on investments and loans, pay out handsome dividends, and are doing well in today’s market, according to Weiss Ratings senior analyst Mike Larson. He shares his Top 10 list.

Extremely juicy, market-beating dividend yields. Large capital gains on top of that. Attractive leverage to an improving economy. Relative immunity to the rate-hiking cycle...or even enhanced profit potential because of it?

It sounds too good to be true. But finding all of that is as easy as “BDC.”

The acronym stands for Business Development Company, a type of specialty finance company that toils away in relative obscurity but that’s doing very well in today’s market. Specifically, these lender/asset manager hybrids help finance smaller, development-stage and higher-risk companies by investing in their debt and equity securities. Those companies either can’t or don’t want to turn to traditional banks, or need the hands-on advice and mentorship that BDCs provide.

The underlying companies that BDCs fund are clearly riskier than your standard blue-chip, mega-corporations. But BDCs receive generous yields on their investments and loans as a result. They then turn around and use the hefty yields they receive to pay out handsome dividends to shareholders.

In fact, BDCs have to distribute at least 90% of their taxable income as dividends–much like Real Estate Investment Trusts (REITs). But unlike REITs, which tend to underperform when interest rates rise, BDCs can actually benefit from Federal Reserve interest rate hikes.

That’s because many of their loans are of the floating rate variety, and are pegged to the key, global benchmark interest rate called the London Interbank Offered Rate (or LIBOR). LIBOR rises in virtual lockstep with the federal funds rate the Fed controls.

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