5 Best BDCs to Ride Out a Risky 2022

Business development companies (BDCs) are a small but sky-high-yielding industry that effectively acts as private equity for the common man.

Concept art of a stack of cash so high that some of the bills are blowing off
(Image credit: Getty Images)

Wall Street received a painful reminder this year that the stock market isn't a free-money machine. Stocks don't always march higher, and the risk of declines, if perhaps only temporary, are very real. Dividends, however, allow you to realize consistent cash returns and avoid the need to sell at inopportune times – and few areas of the market produce higher dividends than business development companies (BDCs).

Business development companies are like private equity funds for the common man, though they have some important differences. Whereas private equity funds tend to be opaque, have long lockup periods and are restricted to high-net-worth and institutional investors, BDCs are publicly traded on the stock market and are completely transparent.

BDCs make debt and equity investments primarily in "middle market" companies that are generally a little too big for bank financing but not quite big enough to go public via an initial public offering (IPO). They invest in the proverbial Main Street … or at least, this is as close to Main Street as Wall Street gets.

Main Street suffered much more than Wall Street during the pandemic, so it's not surprisingly that many BDCs entered 2022 below their pre-COVID prices. Their cheapness relative to the rest of the market makes them attractive, particularly given that BDCs are also some of the highest-yielding stocks you're going to find.

Like their cousins, real estate investment trusts (REITs), BDCs were created by Congress to encourage investment in the real economy, and both benefit from preferential tax treatment, paying no income tax at the corporate level so long as they pay out at least 90% of their net income as dividends.

This is why BDCs and REITs generally have such high dividend yields. They're legally mandated to pay out nearly every red cent, and the absence of taxes makes more cash available to pay.

Let's look at five of the best BDCs to get our portfolios through 2022 and beyond.

Data is as of March 17. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

Charles Lewis Sizemore, CFA
Contributing Writer, Kiplinger.com

Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas, where he specializes in dividend-focused portfolios and in building alternative allocations with minimal correlation to the stock market.