Harry Domash's Winning Investing

Like Dividends? Check Out BDCs

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

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