January 14, 2011

Big Dividends and Momentum: BDCs Offer Both

Improvements in the economy give BDCs a boost

Business development companies (BDCs) represent a unique sector of the market. Structured similarly to a REIT, these firms don’t have to pay income tax if they pass along at least 90% of their operating profit in the form of dividends to their investors. As a result, many of these stocks offer double-digit yields. 

Most BDCs loan money to businesses, a niche that banks have avoided since the credit crisis. As a result, spreads in such loans are quite attractive. And with the economy clearly improving, demand for loans is improving. BDCs are on a roll.

I first wrote about BDCs in the June Searching for Alpha newsletter. Readers may also want to check out the newest info from Fifth Street Finance (FSC), which represents, in my view, a good way to access this sector. For more information on Fifths Street, here is a recent communication from FSC.

Disclosure: Author’s portfolios own the following mentioned stocks: FSC

You can also follow Ben Warwick on Twitter at @QESAlpha.

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