One approach to the market at this time that makes sense is to accumulate a portfolio of dividend paying stocks to balance out the LOTM Under $10 idealist. I know each of us has a limited amount of money, but I also know that some of you have been sitting on cash due to the uncertain economic and political situation. Dividends in the 4% to 13% area are readily available. Building a portfolio with 3% to 5% of available cash, in any one stock, would give you a diversified income portfolio that could average about 8 or 9 percent return in dividends – perhaps growing dividends.
Keep in mind that ten year treasuries are paying 1.97%. Thirty year Treasuries are paying 3.99%. This is your benchmark.
With treasuries, your risk is when the economy improves, interest rates will rise and treasury prices will drop. The opposite will happen with stocks. When the economy improves and interest rates rise, price earnings multiples, which are compressed because of fear of recession and political uncertainty, will expand thus driving stock prices higher. The moral of the story is that what looks safe today (treasuries) are probably higher risk longer term than what feels risky (stocks) which will rise in price when current events normalize – which they will.
Business Development Companies are among the higher dividend paying sectors in the stock market so we thought it would be a good idea to talk about them a bit.
What Does Business Development Company – BDC Mean?
Business Development Companies (BDC’s) is a form of publicly traded private equity in the United States created by Congress in 1980 as amendments to the Investment Company Act of 1940. A BDC is company that is created to help (make loans to) small companies grow in the initial stages of their development. BDCs are very similar to venture capital funds. Many BDC’s are set up much like closed-end investment funds and are actually public companies that are listed on the NYSE, AMEX and NASDAQ.
BDCs are usually taxed as regulated investment companies (RIC) under the Internal Revenue Code. Like real estate investment trusts (REITs), as long as the RIC meets certain income, diversity, and distribution requirements, the company pays little or no corporate income tax. As a pass-through tax structure, RICs must distribute at least 90 percent of taxable income as dividends to investors. Most BDCs distribute 98 percent of their taxable income to avoid all corporate taxation.
Because income is not taxed at the corporate level, distributions to investors are generally taxable for investors based on the type of income earned by the BDC. For example, ordinary income to the BDC is taxable for investors at ordinary income rates, while capital gains income to the BDC is generally taxable for investors at capital gains rates.
The biggest risk in owning BDC’s is the unknown valuation of the companies they lend money to. BDC’s clients are generally privately held companies; so no public information is available about them. The risk is a recession or depression where client companies cannot repay loans.
There is certainly a need in financing private industry in the US. Banks are not lending. As a country, we cannot expand jobs without financing the companies that grow jobs. With the spread between what banks pay depositors – less than 1%, and what they charge on credit cards – 19% to 27%, there is room for lending opportunities. BDC’s is an industry that fills this opportunity/need to finance new industries that create jobs!
Subscribe to LivingOffTheMarket for one month ($39.95) and we will send you our list of high dividend Business development Companies along additional high dividend paying stocks we find of interest!
WORTH LISTENING TO TWICE
By Catherine Austin Fitts former Assistant Secretary of Housing and former partner with Dillon Read.