Why REITs and BDCs Can Pay Such High Dividends

One of the most common questions we receive is why the Fly High Investing portfolio is built primarily from Real Estate Investment Trusts, or REITs, and Business Development Companies, known as BDCs. The answer is surprisingly simple. These companies were specifically designed to pass most of their earnings directly to shareholders, making them uniquely suited for income-focused investors.

When we began searching for companies with both high earnings and high dividend yields, REITs and BDCs naturally rose to the top. They weren’t just paying larger dividends than most traditional corporations—they were structured differently. The reason lies in federal law. To maintain their special tax status, both REITs and BDCs generally must distribute at least ninety percent of their taxable income to shareholders. That single requirement allows them to pay substantially higher dividends than most traditional corporations.

This structure also benefits investors by eliminating an entire layer of taxation. A traditional corporation pays corporate income tax before any profits are distributed as dividends. Investors then pay taxes again when they receive those dividends. REITs and BDCs generally avoid corporate income tax by passing their earnings directly to shareholders. If those dividends are held inside a Traditional IRA or 401(k), taxes are deferred until withdrawal. Inside a Roth IRA, qualified withdrawals are generally tax-free.

These structures weren’t created by accident. Congress established REITs in 1960 to give everyday investors access to large-scale commercial real estate—an opportunity that had previously been available primarily to large institutions. Business Development Companies were later created to provide capital to small and medium-sized American businesses that often have limited access to traditional financing. In both cases, Congress encouraged investment by rewarding companies that return most of their earnings directly to shareholders.

Although they operate in very different industries, REITs and BDCs share the same fundamental objective. REITs own or finance income-producing real estate, while BDCs provide financing to growing businesses. Both are federally regulated, both are designed to generate income, and both generally distribute most of their taxable earnings to shareholders.

For income investors, this creates a powerful combination. You receive higher dividend income, companies gain efficient access to capital, and the broader economy benefits from increased investment in commercial real estate and American businesses.

Once you understand how REITs and BDCs are structured, it becomes easy to see why they form the backbone of the Fly High Investing portfolio. Their unique design allows them to generate the high, earnings-supported dividends that income investors seek while continuing to support long-term economic growth.