A stock with an 11.5% dividend yield sounds like a disaster in the making. But there are exceptions. For some years now, yields that high or close to it have been common in shares of "business development companies" (BDCs). These firms are second cousins to real estate investment trusts because they get big tax breaks as long as they pass nearly all of their earnings to the shareholders as dividends. And as long as the economy hums, well-run BDCs should have no trouble keeping up the good results.
BDCs borrow money from banks or other sources and then make small, short or medium-term loans (at much higher interest rates) to developing companies. Sometimes the terms of these loans give the BDC a minority ownership stake as well. The combination of profits from the spread on the BDC's interest dealings and the dividends or capital gains from its stakes in businesses produces the cash flow that turns into your dividends. Sometimes a BDC also benefits when one of its client companies is bought out for a higher price. The current boom in mergers and acquisitions is a favorable trend for the BDC industry.
Got all that? Well, then, need an idea? Consider MCG Capital (symbol MCGC), one of the standard-bearers in this field. It trades for $14.50 a share. This week, A.G. Edwards analyst Paul Hamilos upgraded MCG to a "buy" and set a target price of $16, citing an improved outlook for loan and earnings growth. MCG's dividend is 42 cents a quarter, or $1.68 a year, so the yield is between 11% and 12%. The Edwards upgrade pushed the stock up more than 4% on Wednesday, but it's still trading near its 52-week low.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
There is a speculative element here, and if you invest in BDCs, you need to be patient. For example, MCG shares doubled in value in 2003 and have dropped a few bucks ever since, but the dividends have stayed steady. Researchers at Friedman Billings Ramsey note that delinquencies in MCG's loan portfolio are low and falling, so the dividend outlook for the next year or two is secure.
BDC dividends aren't absolutely equivalent to payouts from standard stocks. Again, like REITs, most BDC income is taxable at ordinary rates instead of the 15% maximum rate on most dividends. That's because, like REITs, BDCs themselves aren't taxed on the money they pass through to you -- there is no "double taxation" of dividends. However, according to MCG's latest dividend release, about 30% of its payout does qualify for gentler tax treatment, either as capital gains or as nontaxable return of capital.
--Jeffrey R. Kosnett
-
The Top 10 Side Gigs For Retirees In 2026Money is freedom in retirement; here’s how to earn more of it with a profitable side gig
-
3 Retirement Changes to Watch in 2026: Tax EditionRetirement Taxes Between the Social Security "senior bonus" phaseout and changes to Roth tax rules, your 2026 retirement plan may need an update. Here's what to know.
-
The 'Yes, And...' Rule for RetirementRetirement rarely follows the script. That’s why the best retirees learn to improvise.
-
If You'd Put $1,000 Into UPS Stock 20 Years Ago, Here's What You'd Have TodayUnited Parcel Service stock has been a massive long-term laggard.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
-
If You'd Put $1,000 Into Oracle Stock 20 Years Ago, Here's What You'd Have TodayORCL Oracle stock has been an outstanding buy-and-hold bet for decades.
