Many are looking into BDCs for their attractive yields as they are required to pay out at least 90% of interest income received in cash dividends. BDCs act as an alternative to bank loan debt, helping smaller companies grow and profiting off the investments. In an expanding economic environment, BDCs should also benefit from stronger domestic businesses. Additionally, since the debt is typically senior secured and set to float with interest rate benchmarks, there is diminished rate risk.
Additionally, preferred securities and related ETFs, like the Market Vectors Preferred Securities ex Financials ETF (NYSEArca: PFXF), also offer attractive yield opportunities. PFXF has a 6.26% 12-month yield.
Preferred stocks are a type of hybrid security that show bond- and equity-esque characteristics. The shares are issued by financial institutions, utilities and telecom companies, among others. Within the securities hierarchy, preferreds are senior to common stocks but junior to corporate bonds. Additionally, preferred stocks issue dividends on a regular basis, but investors are unlikely to enjoy capital appreciation on par with common shares. However, while preferred stocks provide investors with an attractive source of yields, the assets are vulnerable in a rising interest rate environment.
PFXF only follows non-financial preferred securities, but it includse a 34.1% tilt toward real estate investment trusts and the rest of the portfolio is comprised of utilities, industrials, and consumer names.
For more information on dividend-paying stocks, visit our dividend ETFs category.
Max Chen contributed to this article.