Harry Domash's Winning Investing

Like Dividends? Check Out BDCs

The last time looked, the overall market, at least as measured by the S&P 500 equal weighted index (RSP), was down around 2% year-to-date and U.S. Government bond yields were paying around 4.7%.

But there’s one relatively overlooked common stock category with most of its members up over 10% year-to-date. Not only that, most are paying double-digit dividend yields. I’m talking about Business Development Companies (BDCs).

About BDCs

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 the 15%/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.

Now that I have your attention, 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. Fidus 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 11.7% yield. Stellus has returned 11.2%, year-to-date, 20% over 12-months, and averaged 30% 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 40% year-to-date, 44% over 12 months, and averaged 29% annually over three years.

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 10/23/23

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