Dividend-News

This 10% Yielding Sector Will Continue To Rally In 2021

Published Sun, 13 Dec 2020 08:00:00 -0500 on Seeking Alpha

Seeking AlphaDividend IdeasThis 10% Yielding Sector Will Continue To Rally In 2021Dec. 13, 2020 8:00 AM ET|| Includes: AINV, ARCC, CGBD, CSWC, FCRD, FDUS, FSK, GAIN, GLAD, HTGC, MAIN, MRCC, MRCCL, NMFC, OCSL, PBB, PBC, PFLT, PNNT, PSEC, TCPC, TCRW, TCRZ, TPVG, TSLXby: BDC BuzzBDC Buzz Sustainable DividendsBuild a portfolio with sustainable dividend yields ranging from 8% to 12%SummaryBDCs have outperformed over the last few quarters mostly due to reporting stronger-than-expected results.
I'm expecting the average BDC to deliver total returns of around 25% from their current prices through 2021 for the reasons discussed below.
The average BDC is currently yielding 10% with an average dividend coverage ratio of 110% for Q3 2020 and improving net interest margins.

Introduction
This article is part of a series discussing how to build a retirement portfolio using general market volatility and business development companies ("BDCs"). Similar to REITs, BDCs are regulated investment companies (RICs) required to distribute more than 90% of their profits and gains to shareholders, avoiding corporate income taxes before distributing to shareholders. This structure prioritizes income to shareholders (over capital appreciation), driving higher yields that currently range from around 7% to 13% (shown below).
Investors Need To Be Prepared For Lower Interest Rates
As discussed in previous articles, demographic factors such as the aging of the global population, longer average life expectancy, and lower labor force participation combined with slower growth/productivity in the overall markets have depressed Treasury yields. These factors are going to keep these interest rates at these levels for a long time, and you cannot survive on a 1.5% nominal interest rate.
Since the 1300s, global nominal bond yields have dropped from over 14% to around 2%:

Source: VisualCapitalist
So Where Can Investors Still Get Higher Yields In This Environment?
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