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Tags: shareholder yields | retirement income | main street capital | ares | oxford square

Bob Ciura: 3 High-Yield Business Development Companies Yielding Over 7%

Bob Ciura: 3 High-Yield Business Development Companies Yielding Over 7%

Bob Ciura By Friday, 20 January 2023 03:45 PM EST 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 November 2nd, Main Street Capital announced a 2.3% dividend increase to $0.225 per share paid monthly. On November 3rd, Main Street Capital reported third quarter 2022 results. Net investment income of $62.4 million for the third quarter was a 27% increase compared to $49.3 million in Q3 2021. The corporation generated net investment income per share of $0.83, up 17% year-over-year from $0.71 per share. Distributable net investment income per share totaled $0.88, up 16% from $0.76 in Q3 2021.

Main Street’s net asset value per share increased compared to the end of 2021, from $25.29 to $25.94 a 2.6% increase. The corporation declared monthly dividends of $0.225 to be paid in the first quarter of 2023, and a supplemental $0.10 dividend to be paid in December. This monthly dividend is 4.7% higher than those declared for the first quarter of 2022.

As of the end of the third quarter 2022, the corporation had aggregate liquidity of $420 million, consisting of $61 million in cash and cash equivalents, and $359 million of unused capacity under the revolving credit facility. Shares currently yield 7%.

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 October 25th, ARCC reported Q3 results. Earnings are shooting higher thanks to higher interest and stable underwriting performance. Core earnings per share increased 6.4% year-over-year while net investment income increased by a whopping 42.5% year-over-year from $0.40 to $0.57. That said, rising interest rates and a softening economic outlook hurt the mark-to-market value of ARCC's investments, dropping the NAV from $18.81 to $18.56.

The debt-to-equity ratio of 1.27x was flat sequentially and the balance sheet continues to have significant flexibility, with $4.5 billion of total available liquidity and only $750 million in debt obligations maturing in the next 16 months.

Thanks to the rapid growth in the income, management decided to declare the largest hike of its quarterly dividend in the company's history, growing it by 11.6% sequentially and 17% year-over-year to $0.48. On top of that, ARCC will also be paying out a $0.03 special dividend as per its announcement back in February. The investment portfolio health remained in sound shape despite the deteriorating economic environment. Shares currently yield 10%.

Oxford Square Capital (OXSQ)

Oxford Square Capital Corp. is a BDC (Business Development Company) specializing in financing early and middle-stage businesses through loans and CLOs. The company holds an equally split portfolio of First-Lien, Second-Lien, and CLO equity assets spread across 7 industries, with the highest exposure in software and business services at 34.2% and 27.8%, respectively.

The company’s assets have a gross investment value of around $340.2 million in 61 positions, with 68% of debt securities being secured. OXSQ generates around $40 million in annual interest payments and is based in Greenwich, Connecticut.

On November 7th, Oxford Square reported its Q3 results for the period ending September 30th, 2022. The company generated approximately $11.4 million of total investment income, up 15.2% from the previous quarter. The rise in total investment income was due to rising interest rates. Specifically, the weighted average yield of the debt investments came in at 10.4% at the current cost, compared to 9.0% during Q2-2022. This increase was partially offset by a lower cash distribution yield from OXSQ’s CLO equity investments, which declined from 20.7% to 16.6% sequentially.

Total expenses, which primarily include interest paid on its own financing and managers’ fees, amounted to $5.8 million, stable against Q2-2022. As a result of a higher total investment income and stable expenses, NII (the net investment income) amounted to $5.6 million, or $0.11/share, compared to $4.3 million or $0.09 sequentially.

OXSQ has a current yield above 12%, although with a payout ratio above 100%, the dividend should be considered risky, albeit attractive for income investors.
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. BDCs receive favorable tax treatment, and in return, they aren't allowed to retain earnings.
shareholder yields, retirement income, main street capital, ares, oxford square
Friday, 20 January 2023 03:45 PM
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