Dividends paid by most corporations, are taxed twice.
First the corporation pays taxes on the income that it generates to
pay the dividends to its shareholders.
Then, those shareholders are taxed when they receive
the dividends.
However, Business
Development Companies (BDCs) are an exception. These corporations
don’t pay income taxes as long as they distribute at least 90% of
taxable income to shareholders in the form of dividends and meet
certain other requirements. Why? s
Congress created BDCs to encourage investments in mid-sized
businesses, firms too small to “go public,” but too large to borrow
from local banks. 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.
Although relatively unknown to many investors, there are actually 40
or so authorized BDCs trading on U.S. stock exchanges. And here’s
the good news, most are paying quarterly dividends equating to 7% or
8% dividend yields.
Now that I have your attention, here are four of my favorite BDCs
Ares Capital
(ARCC):
Ares typically invests
in companies operating in the healthcare, software, consumer
services, consumer durables and apparel industries. In
September, Ares raised its quarterly dividend by 2.5%, bringing its
dividend yield up to 7.5%. Its total return (capital appreciation
plus dividends), was 38% in 2021.
Hercules Capital
(HTGC): Hercules offers senior secured venture growth loans to
high-growth, innovative venture capital-backed companies in the
technology, life sciences and sustainable and renewable technology
industries. Hercules likes to pay dividends. It just raised its
regular quarterly payout by 3% to $0.33 per share, which equates to
a 7.4% yield. However, it has been also paying special dividends
ranging from $0.05 to $0.07 per share in each quarter this year.
Taking those into account raised its effective yield to 8.7% last
year. Counting dividends and capital appreciation, Hercules returned
27% in 2021.
TriplePoint Venture
Growth (TPVG): TriplePoint specializes in lending to, and taking ownership
(equity) positions in
companies in the
start-up (venture capital) stage, mostly in the high-tech and life
sciences industries. TriplePoint is externally managed by
TriplePoint Capital LLC, a Palo Alto firm that has provided
financing for the likes of Facebook, YouTube, etc. TriplePoint pays
a $0.36 per share quarterly dividend which equates to an 8.4% yield.
However, counting its significant share price appreciation,
TriplePoint returned 51% last year.
Trinity Capital
(TRIN): Trinity, although
a January 28, 2021 IPO, has been operating since 2008. It
specializes in providing venture debt and equipment financing as
well as management assistance to startups with revenues up to $100
million. Trinity declared its first quarterly dividend, $0.28 per
share, in March. Trinity increased its quarterly payout by $0.01 to
$0.29 per share in June, raised it to $0.33 in September, and again
raised it to $0.36 per share in December. Current dividend yield is
8.0%. Trinity’s total return from its January 28, 2021 IPO to
December 31 was 27%.
Those are my ideas, but do your own due-diligence before taking
action. The more you know about your stocks, the better your
results.
published 1/19/22
