There's one relatively overlooked common stock category with positive year-to-date returns and double-digit dividend yields. I'm talking about Business Development Companies, or BDCs, explains Harry Domash, income specialist and editor of Dividend Detective.
BDCs are a special type of corporation created by Congress to encourage lending to middle market sized businesses. These are firms too small to “go public,” but too large to borrow from local banks.
BDCs can pay high dividends because they don't pay federal income taxes as long as they distribute at least 90% of taxable income to shareholders. That's the good news.
On the downside, their dividends are taxable at ordinary rates, not the15% to 20% maximum rates that apply to taxes from regular corporations. So it's best to hold them in tax-sheltered accounts.
BDC loans, typically in the $25 million to $200 million range, are used to fund acquisitions, restructurings, leveraged buyouts and other financial transactions. To qualify for the Federal tax break, BDCs must offer “significant managerial assistance” to their clients. Here are three BDCs worth considering:
Fidus Investment (FDUS)
Fidus specializes in leveraged buyouts, refinancings, change of ownership transactions, recapitalizations, strategic acquisitions, mezzanine, growth capital, and business expansions. It pays regular quarterly dividends plus special payouts each quarter.
In March, it raised its regular quarterly payout by 14% to $0.41 per share. It also raised its special payout by $0.02 per share (7%), in each of the last two quarters.
Taking the regular and special payouts together, it's currently paying $0.72 per-share quarterly, which equates to a 15.8% yield. Fidus has returned 6.6% year-to-date, 20% over 12 months, and averaged 35% annually over three years.
Stellus Capital Investment (SCM)
Stellus invests in private middle-market companies via first liens, second liens, and mezzanine debt financing, often with a corresponding equity investment.
It pays monthly dividends, currently $0.1333 per month, which equates to an 12.4% yield. Stellus has returned 5%, year-to-date, 13% over 12-months, and averaged 27% annually over three years.
Capital Southwest (CSWC)
Capital Southwest specializes in credit and private equity and venture capital investments in middle market companies. It currently pays $0.56 per share regular and $0.06 per share special quarterly dividends, resulting in an 10.8% dividend yield.
It raised its regular quarterly dividend by $0.02 to $56 per share in September, which was 8% above its year-ago regular payout. It raised its special payout by $0.01 to $.06 per share in September, which had been at $0.05 since September 2022. Capital Southwest has returned 34% year-to-date, 38% over 12 months, and averaged 32% annually over three years.
Those are my three BDC-related ideas, but do your own due-diligence before taking action. The more you know about your stocks, the better your results.
