Business development companies (BDCs) are a small but high-yielding industry that effectively acts as private equity for the common man.
If you're looking for stable, high-yield income, business
development company (BDC) stocks should be on your short list. BDCs are
generally some of the highest-yielding equities available, and today is no
exception.
BDCs are similar to their cousins, real estate investment
trusts (REITs), in that both were creations of Congress to stimulate
investment, and both benefit from preferential tax treatment. They pay no
income taxes at the corporate level so long as they pay out at least 90% of
their net income to their investors as dividends. This is why BDCs, along with
REITs, tend to have such high dividend yields. They're legally mandated to pay
out nearly every red cent.
BDCs are essentially private equity funds. The only real
differences are that private equity funds tend to be opaque, have long lockups
and are restricted to high-net-worth and institutional investors, whereas BDCs
can be bought and sold like any other stock on the major indices.
Think of business development companies as private equity
funds for the common man. BDCs make debt and equity investments primarily in
established companies, though most focus on "middle market" companies
that are often a little too small for the big boys in private equity. This is
as close to "Main Street" as Wall Street gets.
And as with private equity managers, BDC executives are not
passive portfolio managers. They will often take an active role in advising
their portfolio companies.
While the stock market has been on fire for most of the past
several months, many BDC stocks remained far below their pre-COVID prices,
which is the sort of thing that will get your attention in an otherwise
expensive market.
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