Business development corporations (BDCs) are a great addition to a high-yield portfolio. With yields over 8%, and sometimes even over 10%, these companies provide a strong income stream right now, and can bolster the overall yield of your portfolio. But BDCs can be dangerous. Because they are legally required to return 90% of their income to shareholders, and because they regularly issue a lot of new shares to expand operations, capital gains are rare in these asset classes and dividend cuts are common.
BDC investors need to carefully track how companies’ net investment income (NII) is trending, because they use NII to fund payouts. If NII falls below the dividend, a cut to payouts is likely. This happened early last year with Prospect Capital Corporation (PSEC). Investors might want to look for BDCs that have never cut their dividend. There is one: Main Street Capital Corporation (MAIN). At the same time, you want a company with strong management, a high yield, and strong dividend coverage. Triangle Capital Corporation (TCAP) fits this profile
Source: InvestorPlace
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