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.
