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.
Continue reading …
Comments
Post a Comment