In my previous posting I discussed the need to include high-yielding securities in a retirement portfolio, in Part 2 I reviewed Preferred Stocks. In this article we’ll discuss BDC’s (Business Development Company).
BDC’s are companies that function like Venture Capital or Private Equity funds however they allow smaller investors like you and me to invest in their companies. VC and PE funds are often closed to all but wealthy investors. BDCs, on the other hand, allow anyone who purchases a share to participate in the open market.
BDCs have become popular since they pay little or no corporate income tax and must distribute at least 90 percent of taxable income as dividends to investors. Many BDC’s distribute 98 percent of their taxable income to avoid all corporate taxation. This results in many cases in both capital growth and high-yields. Returns to the stock holder matches the on the type of income earned by the BDC. Ordinary income to the BDC is taxable to us as ordinary income and their capital gains is generally taxable to us as capital gains.
Here are some of my favorite BDC’s you should consider:
- Prospect Capital Corp (PSEC) 11.50% yield
- Ares Capital Corp. (ARCC ) 8.41% yield
- Hercules Technology Growth Capital (HTGC) 7.03% yield
Check out the performance of Hercules Technology Growth Capital in the past year. Not only has it out performed the S&P 500 index, but it also delivered > 7% dividend yield.
By allocating a portion of your portfolio to some of these ultra-high-yielding investments you’ll be able to improve your cash flow while waiting for the next Facebook or Apple investment to come along. In future posts we’ll discuss the pros and cons of these investments and some helpful tips.