Hello, YieldAlley readers! In this issue:

• Understanding Business Development Companies for Income Investors

• Stocks Close Higher on Favorable Inflation Data

• You’re not imagining it — online discounts are getting stingier.

• And more!

NEWS

Standout Stories

🛒 You’re not imagining it — online discounts are getting stingier (Sherwood)

👟 Nike’s New CEO Has One Hell of a Challenge Ahead (Wired)

🤖 Sam Altman tells OpenAI staff there’s no plan for him to receive a ‘giant equity stake’ in company (CNBC)

🎢 Disney's theme parks have seen a slowdown. Is it a temporary blip? (Yahoo Finance)

🇺🇸 The US and China finally agree on what to do about the economy (Sherwood)

MARKET THOUGHTS

Stocks Close Higher on Favorable Inflation Data

• U.S. stocks finished mostly higher, with the Dow Jones Industrial Average reaching a new record.

  • The S&P 500 is up 5.6% for the third quarter and nearly 22% year-to-date.

  • Energy and utilities sectors led gains, while tech stocks declined.

  • NVIDIA fell 2% on reports of China urging local companies to avoid its chips.

• Inflation data continues to trend favorably.

  • Headline PCE inflation rose 2.2% year-over-year in August, the lowest since 2021.

  • Core PCE inflation increased 2.7% year-over-year, in line with expectations.

  • The three-month annualized change in core PCE is at 2.06%, aligning with the Fed's 2% target.

  • Goods prices deflated, falling 0.2% in August.

• Bond yields declined:

  • The 10-year Treasury yield fell to 3.75%.

  • The 2-year Treasury yield dropped to 3.56%.

• Global markets:

  • Asian markets rallied, with Japan's Nikkei gaining over 2%.

  • Chinese markets surged, with the CSI 300 Index up over 15% in five days, the best stretch since 2008.

  • The rally in Chinese markets follows recent stimulus measures to support the economy.

INCOME BUILDING

Understanding Business Development Companies for Income Investors

In the realm of income investing, Business Development Companies (BDCs) have emerged as a compelling yet complex option. But what exactly are BDCs, and why are they capturing the attention of yield-seeking investors?

BDCs are specialized investment firms that provide capital to small and medium-sized U.S. companies. Created by Congress in 1980 to fuel job growth and assist emerging businesses, these unique entities offer retail investors access to private equity-style investments typically reserved for institutional players.

The allure of BDCs lies in their high dividend yields, often surpassing 5% and sometimes reaching double digits. This income potential stems from their structure as regulated investment companies (RICs), requiring them to distribute at least 90% of their taxable income to shareholders. For income-focused investors, particularly retirees, this can be an attractive proposition.

BDCs invest in a variety of ways, including making loans and purchasing equity in their target companies. They can focus on senior secured debt, subordinated debt, unsecured debt, preferred stock, or common stock. Some BDCs specialize in specific types of investments, while others take a more diversified approach.

What sets BDCs apart is their involvement with portfolio companies. Beyond providing capital, many BDCs offer significant managerial assistance, actively working to enhance the value of their investments. This hands-on approach can potentially lead to both income generation and capital appreciation for BDC shareholders.

BDCs come with their share of risks. These companies often employ leverage to enhance returns, borrowing money to make investments. While this can amplify gains in favorable markets, it can also magnify losses during downturns. The illiquid nature of many BDC holdings, primarily invested in private companies, can exacerbate this volatility.

Interest rate sensitivity is another key consideration. Rate changes can affect a BDC's borrowing costs and, consequently, its profitability and ability to maintain distributions. Credit risk is also a factor, as BDCs invest in smaller, often less established companies that may be more vulnerable to economic shifts.

The tax treatment of BDC dividends adds another layer of complexity. Unlike qualified dividends, BDC distributions are typically taxed as ordinary income. This can result in a higher tax burden for investors holding BDCs in taxable accounts, making them potentially more suitable for tax-advantaged retirement accounts.

Despite these challenges, BDCs offer unique benefits. They provide portfolio diversification, exposing investors to a segment of the market not easily accessible through other public securities. Their publicly traded nature also offers liquidity not typically associated with private equity investments.

Let's look at Ares Capital Corporation (ARCC), one of the largest BDCs in the market. ARCC focuses on middle-market companies, providing both debt and equity solutions. As of 2023, it has a diverse portfolio of over 450 companies across various industries. ARCC has consistently delivered dividends to its shareholders, with a yield often exceeding 9%. However, like many BDCs, ARCC's share price can be volatile. During the 2020 market downturn, its stock price dropped significantly before recovering.

The BDC landscape is diverse, with some focusing on specific sectors or investment strategies while others take a more generalist approach. This variety allows investors to tailor their BDC investments to their risk tolerance and sector preferences, but it also underscores the importance of thorough research and due diligence.

What's Your Take?

We're eager to hear your perspective on BDCs. Do you see them as a valuable addition to an income-focused portfolio, or do the risks outweigh the potential rewards?

Share your thoughts - how do you evaluate BDCs, and what role, if any, do they play in your investment strategy? Are you drawn to their high yields and exposure to private companies, or do you have concerns about their leverage and tax implications? Let us know, and we’ll follow up on every response!

INCOME BUILDING

Cash Rates

Government Money Market Funds (7-Day Yields)

• SNVXX (Schwab Government Money Fund - Investor Shares): 4.58%

• SPAXX (Fidelity Government Money Market Fund): 4.60%

• TTTXX (BlackRock Liquidity Funds: Treasury Trust - Institutional Class): 4.90%

• VMFXX (Federal Money Market Fund): 4.87%

Brokered CD Rates (6-Month Rate)

• Charles Schwab: 4.40%

• E*Trade: 4.75%

• Fidelity: 4.35%

• Merrill Edge and Merrill Lynch: —

• Vanguard: 4.55%

ETFs

• SGOV (iShares 0-3 Month Treasury Bond ETF): 5.11%

• BIL (SPDR Bloomberg 1-3 Month T-Bill ETF): 5.04%

• USFR (WisdomTree Floating Rate Treasury Fund): 5.07%

• TFLO (iShares Treasury Floating Rate Bond ETF): 5.06%

BONUSES

Brokerage, Bank and Credit Card Bonuses

Brokerage Bonuses

• E*Trade (still active): Up to $4,000 in bonuses for deposits made within 60 days of enrollment. The lower deposit bonuses are also excellent, with E*Trade offering a bonus of $100 for a deposit of just $50. Offer here.

  • Use promo code PROMO24.

    • $50+ will receive $100

    • $1,000-$24,999 will receive $150

    • $25,000-$49,999 will receive $150

• tastytrade (still active): Offering up to $5,000 in bonuses. Lower deposit bonuses are attractive, with a $100 bonus for a deposit of $5,000 (2% return). Offer here.

• Robinhood (still active): Offering a 1% bonus for transferring any table brokerage holdings. No maximum, but deposits must be held for two years after account opening. Offer here.

Bank Bonuses

• BMO Harris (active) — Earn up to a $560 bonus when you open a new Smart Advantage or BMO Harris Premier checking account. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry

• U.S. Bank (active) — Earn up to a $450 bonus when you open a new Smartly checking account when you use promo code 2024JUL. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry.

• Axos Bank (active) — $500 when you open a new rewards checking account with promo code RC500 and certain requirements. Offer here.

  • Availability: Nationwide

  • Soft credit inquiry.

Credit Card Bonuses

• American Express Marriott Bonvoy Brilliant Card — Get 185,000 Marriott Bonvoy points after $6,000 in spend within the first six months of account opening. Offer here through October 2, 2024.

  American Express Marriott Bonvoy Bevy Card — Get 155,000 Marriott Bonvoy points after $5,000 in spend within the first six months of account opening. Offer here through October 2, 2024.

• Barclays jetBlue Plus Card (active) — Get 80,000 JetBlue points after $1,000 in spend within the first 90 days of account opening. Offer here.

• Chase Ink Preferred (active) — Get 120,000 Ultimate Rewards bonus points when you spend $8,000 in the first three months after account opening. Offer here.

• Capital One Venture (active) — Enjoy $250 on Capital One Travel in your first year and earn 75,000 bonus miles after spending $4,000 in the first 3 months. Offer here.

• American Express Hilton Surpass Card (active) — 150,000 points Hilton Honors points after spending $2,000 in 3 months. Get an additional 50,000 points after spending a total of $10,000 within the first 6 months. Offer here.

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