In this article, we discuss 11 best BDC stocks to buy for the rest of 2023. You can skip our detailed analysis of the business development sector and the performance of dividend stocks, and go directly to read 5 Best BDC Stocks To Buy For the Rest of 2023.
Business Development Companies, or BDCs, are a type of financial institution in the US that primarily provide capital and financing to small and mid-sized businesses. These companies mainly raise capital from investors through the issuance of shares and then invest in a diversified portfolio of debt and equity securities of private companies, with a focus on supporting growth and expansion.
Because of rising inflation, many investors are increasingly interested in BDCs. These companies distribute at least 90% of the interest they earn as cash dividends, similar to how real-estate investment trusts operate. However, BDCs may experience losses on the principal amount they lent to the troubled businesses, which can directly reduce the value of their investments. This was seen during the pandemic of 2020 when businesses had a tough time bouncing back after lockdowns. Instead of giving out new loans, BDCs concentrated on helping the businesses they'd already invested in, which were in danger of not being able to pay back their loans. This led to a sharp drop in the stock prices of some major BDCs in the early months of 2020, with values falling by almost half, as reported by the Wall Street Journal. To assist them, the U.S. government provided temporary relief measures to make it easier for these companies to keep lending during that challenging period.
In addition to their dividends, BDCs are also favored by investors because of their potential long-term returns. Duane Batcheler, a research analyst at BDCBuzz.com, spoke with Forbes about BDCs and suggested that these companies might be a good choice for tax-advantaged accounts like IRAs. Here are some comments from the analyst:
“Investors can benefit from the compounding returns on aggressive income-producing [instruments like BDCs]. As long as you keep them in a tax-advantaged account, you won’t owe annual taxes on any income they produce. That means these returns [could be] compounding and growing your portfolio faster, assuming you choose carefully.”
Rising interest rates can be beneficial for the BDC sector as this can lead to higher yields on the debt investments held by the companies. This can potentially boost their income and profitability, as they earn more interest income from their portfolio companies. However, analysts believe that the ideal situation for this sector is when interest rates are sufficiently high, but not so high that they create financial difficulties for the economy. The S&P BDC Index, which tracks the performance of leading business development companies that trade on major U.S. exchanges, delivered a 9.85% return to shareholders since the start of 2023, slightly underperforming the broader market, which has advanced 12.13% this year so far. The average market value of the companies in the index is about $1.4 billion.
Because BDCs offer steady dividends, investors are increasingly interested in dividend stocks to increase their earnings. Johnson & Johnson (NYSE:JNJ), Walmart Inc. (NYSE:WMT), and The Procter & Gamble Company (NYSE:PG) are some of the most popular dividend stocks among investors because of their long dividend growth track records. In this article, we will further discuss some of the best dividend stocks from the BDC sector.
11 Best BDC Stocks To Buy For the Rest of 2023
Our Methodology:
For this article, we examined Insider Monkey's data on 910 hedge funds as of Q2 2023. We focused on companies in the BDC sector and selected those with the most hedge fund investors tracked by Insider Monkey during that period.
Prospect Capital Corporation (NASDAQ:PSEC) is an American business development company that primarily focuses on providing debt and equity financing to a wide range of middle-market companies in various industries. The company also provides debt financing to its portfolio companies. This can include senior secured loans, subordinated debt, and mezzanine financing.
Prospect Capital Corporation (NASDAQ:PSEC) is one of the best dividend stocks on our list as it offers monthly dividends to shareholders. The company pays a monthly dividend of $0.06 per share and has a dividend yield of 12.06%, as of September 26. It has been paying regular dividends to shareholders for over 70 consecutive months.
At the end of Q2 2023, 4 hedge funds in Insider Monkey's database reported having stakes in Prospect Capital Corporation (NASDAQ:PSEC), compared with 7 in the previous quarter. The overall value of these stakes is over $4.3 million.
Trinity Capital Inc. (NASDAQ:TRIN) is a BDC that provides debt and equity financing to growth-stage companies in various industries. The company mainly serves as a source of capital for smaller and middle-market businesses. On September 13, the company declared a 2.1% hike in its quarterly dividend to $0.49 per share. This marked the company's 10th consecutive quarterly dividend growth, which makes it one of the best dividend stocks on our list. The stock's dividend yield on September 26 came in at 13.7%.
In the second quarter of 2023, Trinity Capital Inc. (NASDAQ:TRIN) reported a total investment income of $46 million, which showed a 37.5% growth from the same period last year. The company ended the quarter with over $130.3 million in available liquidity, including $12.3 million in cash and cash equivalents.
As of the close of Q2 2023, 4 hedge funds tracked by Insider Monkey owned stakes in Trinity Capital Inc. (NASDAQ:TRIN), compared with 5 in the previous quarter. The consolidated value of these stakes is nearly $3 million.
Gladstone Capital Corporation (NASDAQ:GLAD) is an American business development company that offers financial solutions to lower-middle market companies. In addition to debt financing, the company also makes equity investments in the companies it supports. On July 12, it declared a 3.1% hike in its monthly dividend to $0.0825 per share. This was the company's third monthly dividend increase this year, which makes it one of the best dividend stocks on our list. The stock has a dividend yield of 10.30%, as of September 26.
In fiscal Q3 2023, Gladstone Capital Corporation (NASDAQ:GLAD) posted a total investment income of $22.8 million, up significantly by 65.6% from the same period last year. Its net investment income also jumped to $11.6 million, from $9.6 million in the previous quarter.
The number of hedge funds tracked by Insider Monkey owning stakes in Gladstone Capital Corporation (NASDAQ:GLAD) stood at 5 at the end of Q2 2023, the same as in the previous quarter. The overall value of these stakes is roughly $11 million. Among these hedge funds, Millennium Management was the company's leading stakeholder in Q2.
Capital Southwest Corporation (NASDAQ:CSWC) is an American business development company that primarily focuses on providing debt and equity financing to middle-market companies in the country. On August 7, the company increased its quarterly dividend by 3.7% to $0.56 per share. This marked the company's fifth consecutive quarterly dividend hike post-pandemic, which places it as one of the best dividend stocks on our list. The stock has a dividend yield of 10.01%, as of September 26.
As of the close of Q2 2023, 7 hedge funds in Insider Monkey's database reported having stakes in Capital Southwest Corporation (NASDAQ:CSWC), which remained unchanged from the previous quarter. The collective value of these stakes is over $8.3 million.
Goldman Sachs BDC, Inc. (NYSE:GSBD) offers debt and equity financing to support the growth and expansion of its portfolio companies. The company primarily targets middle-market businesses, which are typically smaller than large corporations but larger than small businesses and assists them by providing tailored debt structures.
In the second quarter of 2023, Goldman Sachs BDC, Inc. (NYSE:GSBD) reported an adjusted net income of $0.58 per share and its total investment income came in at $112.1 million. The company had over $42.4 million available in cash, compared with $39.6 million at the end of December 2022.
Goldman Sachs BDC, Inc. (NYSE:GSBD), one of the best dividend stocks on our list, currently pays a quarterly dividend of $0.45 per share. As of September 26, the stock has a dividend yield of 12.15%.
Goldman Sachs BDC, Inc. (NYSE:GSBD) was a part of 7 hedge fund portfolios, compared with 11 in the previous quarter, according to Insider Monkey's database. The collective value of stakes owned by these hedge funds is over $15.5 million. Marshall Wace LLP was the company's leading stakeholder in Q2.
6. BlackRock Capital Investment Corporation (NASDAQ:BKCC)
Number of Hedge Fund Holders: 8
BlackRock Capital Investment Corporation (NASDAQ:BKCC) provides debt financing to its portfolio companies. The company generates income primarily from the interest and fees associated with its debt investments. On August 2, it declared a quarterly dividend of $0.10 per share, which was in line with its previous dividend. The stock's dividend yield on September 26 came in at 10.84%.
BlackRock Capital Investment Corporation (NASDAQ:BKCC) generated roughly $20 million in total investment income, which showed a 62.5% growth from the prior-year period. The company ended the quarter with over $12.4 million available in cash and cash equivalents, up from $9.5 million at the end of December 2022.
The number of hedge funds tracked by Insider Monkey owning stakes in BlackRock Capital Investment Corporation (NASDAQ:BKCC) grew to 8 in Q2 2023, from 6 in the previous quarter. The consolidated value of these stakes is over $4.33 million.
