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3 Business Development Companies Yielding Over 6%

3 Business Development Companies Yielding Over 6%

Bob Ciura By Tuesday, 23 April 2024 12:40 PM EDT Current | Bio | Archive

Business development companies, or BDCs, offer generous yields because they’re required to distribute substantially all of their earnings to shareholders. BDCs receive favorable tax treatment, and in return, they aren’t allowed to retain earnings.

This works out well for income investors because many BDCs have high dividend 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.

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.

On February 22nd, 2024, Main Street Capital reported fourth quarter 2023 results. Net investment income of $90.1 million for the quarter was a 19% increase compared to $75.9 million in Q4 2022. The corporation generated net investment income per share of $1.07, up 9% year-over-year from $0.98 per share. Distributable net investment income per share totaled $1.12, up 9% from $1.03 in Q4 2022.

Main Street’s net asset value per share increased compared to December 31st, 2022, from $26.86 to $29.20, an 8.7% increase. The corporation declared monthly dividends of $0.24 to be paid in the second quarter of 2024, which were 6.7% higher than those declared a year ago, as well as a supplemental $0.30 dividend paid in March. Shares currently yield 6.2%.

Ares Capital (ARCC)

Ares Capital Corporation is a US-based closed-ended specialty finance business development company (BDC). It focuses on generating both current income and capital appreciation through debt and equity investments. The company invests primarily in U.S. middle-market companies, as well as larger companies. Its portfolio is comprised of first and second lien senior secured loans as well as mezzanine debt, diversified by industry and sector.

On February 13th, 2024, Ares Capital Corp. announced its financial results for the fourth quarter of 2023. Core Earnings per share came in at $0.63, exceeding market expectations. This result was driven by strong net investment income and continued robust activity in ARCC's investment portfolio.

The company reported higher total investment income and fee revenue gains and saw its Net Asset Value (NAV) improve from the previous quarter. While its leverage ticked up slightly, the debt remained primarily fixed rate, a strategy shielding ARCC from rising interest rates. Importantly, the company announced an increase in its regular quarterly dividend payment.

Ares Capital is arguably the safest BDC given that it is the only one with investment-grade ratings from all three major rating agencies. Additionally, its balance sheet is in a very strong position with solid and stable asset quality and a diversified long-duration liability structure. It also has very diversified holdings with weighted average interest coverage of over 2 times. ARCC shares currently yield 9.6%.

Prospect Capital Corporation (PSEC)

Prospect Capital Corporation provides private debt and private equity to middle-market companies in the U.S. The company focuses on direct lending to owner-operated companies, as well as sponsor-backed transactions. Prospect invests primarily in first and second lien senior loans and mezzanine debt, with occasional equity investments. Prospect produces just under $900 million in annual revenue.

Prospect posted second quarter earnings on February 8th, 2024, and results were somewhat weak once again. Net investment income per share, which is akin to earnings-per-share for other companies, came to 24 cents. Total investment income was $211 million. That was down fractionally year-over-year from $213 million. Net asset value per share declined from the first quarter from $9.25 to $8.92.

Total originations rose to $172 million for the quarter, which was up from $131 million in Q1. The company noted for the third quarter-to-date, originations were $63 million. Total repayments were $131 million in the quarter, up from $94 million in Q1. Total repayments to-date are $22 million, implying net originations of +$41 million so far in Q3.

The company’s payout ratio was over 100% for several years in the past decade but is slightly under that now given the higher NII-per-share. The dividend is covered by earnings for now. PSEC shares currently yield 13%.

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.

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Business development companies, or BDCs, offer generous yields because they're required to distribute substantially all of their earnings to shareholders.
business, development, high, yield, retirement, income
Tuesday, 23 April 2024 12:40 PM
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