“Alphabet Soup” of Required Dividends

 

“Alphabet Soup” of Required Dividends

BDCs, REITs, and MLPs are great places to look for above-average dividend yields. I jokingly call them the alphabet soup stocks.

What the heck are they?

• A BDC (business development company) allows an individual investor to invest in private companies and smaller public companies.

BDCs provide capital and managerial assistance to smaller companies. These are companies that are hard for individual investors to access. Buying the stock of a BDC opens the door to investing in a basket of curated businesses.

• A REIT (real estate investment trust) grants individual investors access to large real estate portfolios.

Each REIT is unique, with a strategy for investing in different types of real estate. To qualify as a REIT, a company must derive at least 75% of its gross income from real estate–related activities. There are over 255 REITs that trade on the major US exchanges.

• An MLP (master limited partnership) focuses on natural resource–related activities, including oil, gas, coal, timber, and certain methods of transporting commodities.

All three of these structures require the company to pay out the majority of its taxable income to its shareholders. In exchange, it receives tax advantages.