Business development companies make money by making high-risk loans to businesses deemed too small for the public markets, and too risky for banks. By law, BDCs must pay out virtually all of their income, resulting in dividend yields that frequently run into the double digits.
But the sky-high yields offered by PennantPark Investment (NASDAQ: PNNT), Fifth Street Finance (NASDAQ: FSC), and Medley Capital (NYSE: MCC) may be more indicative of outsize risk rather than opportunity. Here’s why.