A Business Development Company (BDC) is a public corporation that helps small- and mid-sized companies with financing. What is appealing to income investors is that BDCs must pay out 90 percent of its taxable income each year to investors in dividends. That can result in high dividend yields from such BDCs as Apollo Investment (NASDAQ: AINV), Garrison Capital (NASDAQ: GARS), and Monroe Capital Corp. (NASDAQ: MRCC).
BDCs are good economic barometers due to the investing at the small- and mid-sized business level.
These are the ones that will grow the most when the economic is strong. By contrast, these will also decline most due to not having the mass of larger companies to withstand bearish economic times. It is a good sign that a BDC survived The Great Recession. That showed that management was sound. It also demonstrated that the investment portfolio could withstand adverse economic conditions.
The high dividend yields make these even more enticing.
At present, the average dividend yield for a member of the Standard & Poor’s 500 Index (NYSE: SPY) is just under 2 percent. Apollo Investment has a dividend yield of just over 11 percent (chart below). The dividend yield for Garrison Capital is 9.58 percent. The shareholders of Monroe Capital Corp. receive dividend income at a rate of 9.32 percent.
Dividend yields like that are obviously very appealing to income investors.
With the American economy improving, the outlook for BDCs should be bullish. The United States continues to pull out of The Great Recession. That is especially true in a low interest rate environment. This makes investments with high dividend yields like BDCs to be even more alluring. As with all investing, it is important to perform due diligence when purchasing shares of BDCs. The level of debt is especially important due to the demands placed on capital flows by the requirements of being a BDC.