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Business development companies, like other closed-end funds, are one of those quirky corners of the investment world that are poorly understood and often overlooked, yet provide high yields.

In the case of business development companies (BDCs), the reason for the high yields is that the entities pay little or no income tax if they pay out at least 90% of their taxable income to investors in the form of dividends—in that way, they are much like real estate investment trusts. The purpose of BDCs, however, and the reason they were given their preferential tax status, is to encourage investments in small- and medium-sized businesses that might otherwise not have access to capital.

Each of the more than dozen or so publicly traded BDCs invests in slightly different ways—making loans to smaller businesses or taking equity stakes in them, doing a combination of both, or entering into more esoteric financial dealings.

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