Investors may not be familiar with Business Development Companies, but this particular group of stocks could be appealing for income seekers. Business Development Companies, or BDCs for short, are a sub-set of the market that typically offer very high dividend yields.

In fact, some BDCs are currently offering double-digit yields. Of course, extremely high dividend yields should be approached with caution. Investors always want to avoid the risk of a dividend cut or suspension. Therefore, investors interested in BDCs should know the risks.

Still, for income investors specifically looking for high yields, these 3 BDCs could be worth looking into.

High Yield BDC: Main Street Capital (MAIN)

Main Street Capital Corporation provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. Main Street defines lower middle market companies as generally having annual revenues between $10 million and $150 million. The company’s investments typically support management buyouts, recapitalizations, growth financings, refinancing and acquisitions.

At the end of 2021, Main Street had an interest in 73 lower middle market companies (valued at $1.72 billion), 36 middle market companies ($395 million) and 75 private loan investments ($1.14 billion).

On February 24th, Main Street Capital released fourth quarter and full year results. Net investment income of $182.7 million for 2021 was a 32% increase compared to $137.9 million in 2020. The corporation generated net investment income per share of $2.65, up 26% from last year’s income of $2.10 per share. Distributable net investment income per share totaled $2.81, up 24% from $2.26 in 2020. Main Street’s net asset value per share increased compared to the end of 2020, from $22.35 to $24.72, a 13% increase.

The corporation declared monthly dividends of $0.215, which is 4.9% higher than in the prior year. Shares currently yield 6.5%.

High Yield BDC: Sixth Street Specialty Lending (TSLX)

Sixth Street Specialty Lending is a specialty finance company focused on providing flexible, fully committed financing solutions to middle-market companies principally located in the US. The fund provides primarily first-lien senior secured loans, mezzanine debt, non-control structured equity and common equity.

Management aims to co-invest with other firms to maximize the potential for organic growth, acquisitions, market or product expansion, restructuring initiatives, recapitalizations and refinancing.

Sixth Street’s portfolio includes 70 investments, with no company making up more than 3.4% of its total assets. Additionally, the portfolio aims to achieve adequate industry diversification, with business services, retain and consumer products, and education, accounting for 16.8%, 12.3% and 12.2% of its exposure, respectively, amongst 14 other industries. The company has around $2.6 billion in assets under management (AUM).

On February 17th, 2022, Sixth Street Specialty Lending reported its Q4-2021 results. NII/share was $0.57, 25.3% lower quarter-over-quarter, while NAV fell by 9.66 % to $16.84. The decline in NII/share was driven by an increase in total expenses. This was driven by higher interest expense resulting from an increase in the average debt outstanding and higher incentive fees due to an increase in pre-incentive fee net investment income.

TSLX’s weighted average total yield on debt remained stable at 10.2%. Its weighted average interest rate of debt fell by 10 bps to 2.2%.

TSLX stock currently yields 7.5%.

High Yield BDC: Golub Capital (GBDC)

Golub Capital is an externally managed, closed-end investment company that invests primarily in one-stop and other senior secured loans of U.S. middle-market companies. The company’s investment criteria require its potential investments to generate annual EBITDA of less than $100 million, have a sustainable leading position in their respective markets, and scalable revenues and operating cash flows.

At the end of 2021, Golub’s portfolio consisted of 301 investments, 79.3% of which were allocated in one-stop debt, 16% in senior secured debt, 3.8% in equity, and 0.9% in junior debt. Diversification by weight seems adequate, with the top 10 investments accounting for around 16% of the total portfolio. Software, Healthcare services, and IT services make up the majority of Golub’s industry exposure, with these three accounting for 22%, 11%, and 6% of the portfolio, respectively.

On February 9th, 2022, Golub Capital reported its Q1-2022 results. Following a larger investment portfolio, the company achieved a total investment income of $86.5 million, a 6.6% increase quarter-over-quarter. However, due to higher base management and administrative fees, net investment income declined by 3.2% to $43.7 million versus the previous quarter. Still, net investment income per share remained stable at $0.27.

Golub stock currently yields 7.9%.

Final Thoughts

Business Development Companies have unique business models and risk factors that investors should carefully evaluate before buying. But for income investors in search of higher yields, many BDCs offer high dividends above 6%. The well-run BDCs can maintain their hefty dividend payouts. MAIN, TSLX, and GBDC have high yields and are worthy of additional consideration by income investors.
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Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.