Sell These 3 Dividend Stocks Paying 10% Before They Crash

Recently I received several questions about individual Business Development Companies (BDCs) that have had strong share price gains in 2019. The questions were whether to buy more, hold or sell now. As with any stock market sector or group, there are good BDCs, bad BDCs, and a lot of average BDCs. The share price gains in 2019 have made some of these stocks too expensive. Especially if business conditions turn less favorable.

Business development companies operate under the Small Business Investment Incentive Act of 1980, which was an amendment to the Investment Company Act of 1940. The 1940 Act is the primary law governing investment products such as mutual funds, closed-end funds, and exchange-traded funds (ETFs). The 1980 Act provided some exceptions to Investment Company Act rules. The purpose was to open a new source of financing for small to medium-size business that do not have access to the public debt and equity markets. In structure, a BDC is closely related to a closed-end fund.

A BDC operates under a strict set of rules. First, a BDC can only make loans or equity investments in small to medium-sized corporations that meet the criteria in the law. The next rule is that a BDC can only have debt equal to two times the equity capital of the company.

For example, a new BDC sells stock and has $500 million from the sale. The company can then borrow another $1 billion, bringing the company’s total investment capital to $1.5 billion. By law, a BDC cannot over-leverage itself.

Finally, a BDC must payout at least 90% of net income as dividends to investors. If a BDC pays out 95%, it gets an additional tax break. BDCs are “pass-through” companies, which means if they pay out the 90% of income then they don’t pay corporate income tax.

The actual business of a BDC involves making loans to small to midsized corporations. These are often companies most at risk if there is an economic slowdown or contraction. BDCs are not allowed to set aside loan loss reserves, so client company problems can quickly lead to dividend cuts from a BDC stock.

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Terrence Howard 10 months ago Member's comment

I agree that $GAIN is far too close to all-time highs. It is a stock WORTH owning, however. So I'd sell now, and re-buy as it dips over the next few weeks/months.

Adam Reynolds 9 months ago Member's comment

unless you have to worry about taxes and will lose your long term tax rate at 15% and plan to hold this for a long time.

Carl Schwartz 10 months ago Member's comment

You really think a crash is inevitable?

Susan Johnson 10 months ago Member's comment

$GAIN has done well for me. I've been wondering how much room there is left to grow.