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Income Investing

BDC Yields: Very High and Very Variable

By Roger S. Conrad, on Apr. 29, 2015

Business development companies (BDC) provide debt and equity capital to small and midsize businesses that lack access to the public market.

Like closed-end funds, BDCs generate income from the debt and equity investments they hold and pay out the majority of their cash flow to shareholders in the form of a dividend. BDCs also pay no corporate taxes because they’re organized as pass-through entities.

The 10 names profiled in “BDC Data Bank” offer an average dividend yield of 11 percent—a huge selling point in this low-yield environment.

(Click table to enlarge.)BDC Table

Several BDCs in our table have also rewarded investors with solid capital gains over the past five years, fueled by impressive asset growth.

Unfortunately, the vast majority of BDCs haven’t backed up their big yields with reliable dividends. Less than half the names in our table pay out more than they did in early 2010, while most have lower dividends than the minimums contemplated in their initial registration statements.

But all the BDCs in my coverage universe have raised their payouts at least once during the good times. Dividends can also fluctuate dramatically. For example, Fifth Street Finance Corp (NSDQ: FSC), which provides financing to small and midsize companies, followed up a 10 percent hike to its September 2014 payment with a 35 percent cut in March 2015.

Even Ares Capital Corp (NSDQ: ARCC) and Hercules Technology Growth Capital (NYSE: HTGC) dish out less cash to shareholders than they did in early 2009.

Of the names in our table that have traded publicly for at least five years, only Triangle Capital Corp (NYSE: TCAP), the latest addition to the Lifelong Income Portfolio, has never cut its dividend.

Aggression Breeds Inconsistency

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