Kiplinger

10 High-Yield BDCs That Could Get a Lift From D.C.

Business development companies (BDCs), with dividend yields averaging between 8% and 11%, already are well worth considering as income investments. Now, thanks to a recent regulatory change, BDCs have even more appeal.

BDCs make loans like banks but serve a different lending niche, consisting of middle-market companies in a high growth mode. Unlike banks, BDCs invest in both debt and equity of companies and provide managerial oversight and advice to clients.

Business development companies yield more than banks because they pay no corporate taxes. As a trade-off, however, BDCs are required to distribute at least 90% of income to shareholders. But because they must rely on debt or equity financing to grow, growth rates can be erratic and BDCs sometimes must cut dividends.

However, BDCs have recently gotten a huge helping hand from Washington. A little-known provision of the $1.3 trillion omnibus spending bill may jump-start BDC growth by freeing these companies from a major constraint. Traditionally, BDCs were required to hold one dollar of equity for every dollar loaned. Under the new rule, BDCs need only hold one dollar of equity for every two dollars loaned, thus enabling their lending operations to grow.

Smaller BDCs may leverage loan growth to increase net interest income (an important earnings metric for BDCs) and dividends. Larger BDCs may opt to improve portfolio quality by increasing the percentage of low-risk loans. In this scenario, while NII doesn't necessarily rise because of lower yields on new loans, the BDC earns a higher valuation multiple as a result of improved portfolio quality.

Here are 10 BDCs

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