Business development companies
For those with a bigger appetite for risk, business development companies, or BDCs, allow retail investors the ability to invest like a venture capitalist. This is because BDCs invest in small, emerging companies, usually offering them loans that larger banks will not.
Like MLPs and REITs, these companies pass along the vast majority of their earnings to shareholders in the form of dividends, which allows the companies higher margins and lower tax burdens. "The good news is that BDCs are required to pass along their earnings to you, the shareholder. The bad news is this means that BDCs can only grow by borrowing more money or issuing stock," says Duane Batcheler, who writes as "BDC Buzz" for Seeking Alpha. "This makes BDCs risky, which justifies their average dividend yield of about 9 percent," Batcheler says.
While BDCs have been around since the early 1980s, they've remained relatively unpopular among retirees looking for a source of passive income despite their relatively generous dividend yields because of their risk.
"The BDC industry is worth about $30 billion and they've been growing since 2008, and some are well-diversified across several sectors," Batcheler says. "Although they're classified as financial companies, really the BDCs expose you to small and mid-sized businesses throughout America in many different industries. I consider buying BDCs investing in America."