Business development companies (BDCs) typically have high dividend yields, as they are required to distribute substantially all — at least 90% — of their earnings to shareholders.
BDCs receive favorable tax treatment and, in return, they aren’t allowed to retain earnings in the same way other companies are.
As a result, dividend yields in the sector are usually above 5%. This article will discuss three BDCs with high dividend yields, which could be attractive for income investors.
Main Street Capital (NYSE:MAIN) is a BDC that provides long-term debt and equity capital to lower middle market companies and debt capital to middle market companies. The company’s investments typically support management buyouts, recapitalizations, growth financings, refinancing and acquisitions.
The company’s dividend policy is somewhat different from others in that it pays a monthly dividend, along with occasional supplemental dividends when financial results are strong.
At the end of Q1 2024, Main Street had an interest in 81 lower middle market companies (valued at $2.4 billion), 22 middle market companies ($239 million) and 88 private loan investments ($1.5 billion). In May, first quarter results reported net investment income of $89.8 million — an 11% increase compared to $81.0 million in the first quarter of 2023.
Main Street also announced a 2.1% monthly dividend increase to 24.5 cents per share to be paid in the third quarter of 2024 (which is 6.7% higher than those declared a year ago), as well as a supplemental 30 cents dividend to be paid in June. MAIN stock yields 8.1%, not including any supplemental dividends paid.
Looking back further, from 2013 through 2022, Main Street grew net investment income by an average compound rate of 5.3% per year, despite the pandemic. This is a solid track record over the past decade.
Gladstone Investment (GAIN)
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Gladstone Investment (NASDAQ:GAIN) focuses on U.S.-based small- and medium-sized companies. Industries Gladstone Investment targets include aerospace and defense, oil and gas, machinery, electronics, and media and communications.
Position sizes for debt investments usually range from $5 million to $30 million. The company also takes equity stakes in such companies, with position sizes for equity investments typically ranging from $10 million to $40 million.
According to Gladstone Investment fourth quarter earnings results reported in May, the company generated total investment income — its revenue equivalent — of $23.7 million during the quarter, an increase of 19% from the prior quarter. This number beat consensus estimates by $0.5 million, as analysts expected a slightly weaker performance for the company’s top line.
Gladstone Investment’s adjusted net investment income per share totaled 24 cents during the fiscal fourth quarter, which was up from the previous quarter. The net asset value (NAV) per share totaled $13.43 on a per-share basis at the end of the quarter, which was also up from Q3.
This weighted average interest yield for this business development company has been very strong in the past, on average staying well above 10%. Gladstone Investment’s dividend payout ratio, relative to its net investment income, has been above 100% throughout the last decade. The projected payout ratio for 2024 is approximately 95%, and GAIN stock yields 7.0%.
TriplePoint Venture Growth (TPVG)
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TriplePoint Venture Growth (NYSE:TPVG) provides capital and guides companies during their private growth stage, before they eventually go public. This includes offering debt financing to venture growth companies, proposing a less dilutive way to raise capital than raising additional equity while also helping with businesses accelerate and expand.
Its investment portfolio mainly consists of debt provision in 49 companies (90% of the total portfolio’s fair value), and $71.9 million (10%) of warrants and equity investments with 105 companies. It is well-diversified amongst 20+ industries, with its highest exposure of 17.5% in consumer products and services. The majority of funds are allocated in the tech sector.
According to the company’s Q1 results, first quarter total investment income of $29.3 million was down from $33.6 million in the same period the year before. This decrease in total investment was primarily due to a lower weighted average principal amount outstanding on the BDC’s income-bearing debt investment portfolio. Specifically, the number of portfolio companies fell from 59 last year to 49.
Nonetheless, the company’s weighted average annualized portfolio yield came in at an impressive 15.4% for the quarter, up from 14.7% in the prior-year period. Also during Q1, the company funded $13.5 million in debt investments to three portfolio companies with a 14.3% weighted average annualized yield at origination. Net investment income per share was 41 cents, compared to 53 cents in the first quarter of 2023.
Distributions should remain covered by the company’s increase in net assets. Also, the estimated undistributed taxable earnings from net investment income currently stand at $1.12 per share — hence, we don’t expect a cut. That being said, due to their obligatory distribution requirements, there is little-to-no margin for capital maneuverings. TPVG stock currently yields 19%, indicating a higher-risk, higher-reward BDC.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. 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.
