The Downside of 10% Dividend Yields

Business development companies offer fat yields, but investors should mind the inherent weaknesses of the structure.

Jordan Wathen
Jordan Wathen
Jul 7, 2014 at 5:52PM

What's not to love about business development companies like American Capital Ltd. (NASDAQ:ACAS)?

They're required by law to pay out all of their income. Dividend yields frequently top an eye-popping 10% per year, as has been the case at Apollo Investment Corporation (NASDAQ:AINV). And many, including rockstars like Ares Capital Corporation (NASDAQ:ARCC), have trounced the market since their IPO. 

What could go wrong?

In the following video, Motley Fool Bureau Chief David Hanson and Fool contributor Jordan Wathen discuss some inherent weaknesses in the BDC model, which are best exemplified in some of the longest-living BDCs on the market today.