3 Business Development Companies With High Dividend Yields
Interest rates on treasuries have been rising in recent months, but they are still too low for many income investors. They also do not offer reliable inflation protection, and payouts from treasuries do not rise over time. Equities are thus still the best choice for many income investors, especially for those looking for somewhat higher yields.
One particular group of equities that can be highly interesting for income investors are the business development companies or BDCs. Business development companies are unregistered, closed-end investment companies that primarily invest in small and medium-sized businesses. By legislation, these BDCs have to invest at least 70% of their assets in US companies with a market value of below $250 million that are not publicly traded.
BDCs thus serve an important function, as they provide capital for small or mid-sized businesses that oftentimes cannot access capital easily. In turn, this allows BDCs to demand interest rates from the businesses it provides capital to that are higher than what the typical bank receives when it loans out money. The yields on investments are thus generally favorably for BDCs, although one can argue that their loans do, on average, come with higher risks than the typical loans made by banks.
BDCs are not taxed on the corporate level as long as they distribute at least 90% of their taxable income to investors. This is comparable to what taxation looks like for REITs, as those also can avoid taxes when making high-enough distributions to their owners.
The special taxation laws explain why BDCs do oftentimes offer quite high dividend yields. Them returning most of their profits to shareholders via dividends leads to attractive dividend yields for investors, while it allows BDCs to avoid corporate taxes at the same time. In this report, we will take a look at three high-yield BDCs that look attractive at current prices.
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