The lesser-known and relatively undervalued business development companies are generating big dividends. Investors can gain exposure to the high-yielding assets through exchange traded fund and exchange traded note options.
For instance, the Market Vectors BDC Income ETF (NYSEArca: BIZD) has a 8.64% 12-month yield. Additionally, the exchange traded note UBS E-TRACS Wells Fargo Business Development Index ETN (NYSEArca: BDCS) has a 8.48% 12-month yield and UBS E-TRACS 2x Wells Fargo Business Development Company Index ETN (NYSEArca: BDCL), which takes the leveraged 200% performance, has a 20.28% 12-month yield. [BDC ETF Options for High-Yield Investors]
Business development companies, or BDCs, are closed-end investment companies created under the Investment Company Act of 1940 that invest in debt and equity of small public and privately held companies. The companies essentially help fund small $5 million to $100 million businesses. Moreover, since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk.
BDCs also offer attractive income opportunities since they are required to pay out 90% of income in form of dividends. As a group, BDCs have yields close to 9%, writes Scott Colyer, CEO and CIO of Advisors Asset Management, for InvestmentNews.
Additionally, Colyer argues that BDCs offer tremendous growth opportunities, along with their high yields. Over the past 10 years, the Wells Fargo BDC Index has generated an average 7.06% annual return, compared to the 8.01% return for the S&P 500.
While the group fell behind the broader markets last year, Colyer believes BDCs may have weakened along with the broader high-yield market. However, unlike other high-yield markets, BDCs lend to financially healthy borrowers.
“We think BDCs are undervalued and potentially have upside to both their dividends and share price,” Colyer said. “Insiders agree, as they have been buying up shares of some larger BDCs in the market. We doubt that insiders would be buying the shares if they expected a decrease in performance. We think insiders are telegraphing an opportunity to investors that these shares may be undervalued and have the potential to outperform in 2015.”
For more information on BDCs, visit our business development companies category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.