As you might suspect, there are a few caveats when it comes to including BDCs in your income-investing portfolio.
First, the business development/private equity cycle can be not only cyclical depending on broader economic conditions, but volatile too, depending on the underlying industries and companies chosen. Stock prices will reflect that, so have no illusions: Use that to your advantage by dollar-cost averaging your way in to build up high-yielding, high appreciation-potential positions over time.
Second, just because these stocks have high yields today does not mean they will tomorrow. BDCs distribute 90% of their cash, which means that they have less of a buffer to absorb periodic operational hiccups than more traditional dividend investment choices.
Third, BDC income is taxed up to 39.6% as ordinary income versus the 20% hit you get with qualified dividends, so housing BDC investments inside tax-advantaged accounts may be best.
The bottom line?
If income is important to you and you want to run with the big boys, BDCs are a solid choice offering the best of several worlds.
Do act quickly if you’re interested, though…I can’t believe that these will stay off the radar for long.