Business development companies, or BDCs, typically have high dividend yields, as they are required to distribute nearly all 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 7%. This article will discuss three BDCs with high dividend yields, which could be attractive for income investors.
Main Street Capital (MAIN)
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 defines lower-middle market companies as generally having annual revenues between $10 million and $150 million. Its investments typically support management buyouts, recapitalizations, growth financings, refinancing and acquisitions.
At the end of Q2 2023, Main Street had an interest in 79 lower middle market companies (valued at $2.2 billion), 28 middle market companies ($296 million), and 88 private loan investments ($1.5 billion).
Main Street Capital reported second-quarter 2023 results. Net investment income of $85.7 million for the quarter was a 57% increase compared to $54.7 million in Q2 2022. The corporation generated net investment income per share of $1.06, up 41% year-over-year from 75 cents per share.
Main Street’s competitive advantage lies in its portfolio of small company interests, allowing for equity and debt exposure that would be difficult to replicate, along with the company’s management. In the last decade, the company has performed well, acting like a fund for small companies and passing along the income and gains to investors.
Distributable net investment income per share totaled $1.12, up 44% from 78 cents in Q2 2022. Main Street’s net asset value per share increased 3.1% to $27.69, compared to Dec. 31, 2022. During the quarter, Main Street Capital announced a 2.2% dividend increase to 23 cents per share paid monthly.
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. Main Street’s dividend policy is somewhat different from most companies in that it pays a monthly dividend, along with supplemental dividends once per year when financial results are strong.
MAIN stock yields 7%.
Gladstone Investment (GAIN)
Gladstone Investment (NASDAQ:GAIN) focuses on U.S.-based small-and medium-sized companies. Industries that 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.
On Aug. 2, GAIN reported second-quarter financial results. Net investment income came to 25 cents while total investment income declined 2.4% year-over-year to $20.3 million. Net asset value per common share as of June 30, 2023 was $12.99, compared to $13.09 as of March 31.
GAIN has a strong operating history. During the financial crisis the company’s profits declined substantially, but Gladstone Investment remained profitable. Over the last five years profits grew by 4.3% annually, which is not a very high growth rate. However, it is also not at all disappointing for a high-yielding investment.
Following a NIIPS decline in fiscal 2020, Gladstone Investment has seen its NIIPS recover meaningfully and hit new record highs in fiscal 2021 and fiscal 2022. It is expected that Gladstone’s EPS will remain relatively flat during the current fiscal year.
Gladstone Investment’s weighted average interest yield has been very strong in the past on average, with a weighted average interest rate of well above 10%. Gladstone Investment’s dividend payout ratio, relative to its net investment income, has been close to or above 100% throughout several years over the last decade. The projected payout ratio for 2023 is approximately 87%. GAIN stock yields 7.4%.
Monroe Capital Corporation (MRCC)
Monroe Capital Corporation (NASDAQ:MRCC) is a specialty finance company focused on providing financing solutions primarily to lower middle-market companies in the United States and Canada. The company primarily invests in senior and “unitranche” secured loans ranging between $2 million and $25 million each.
As of June 30, the company’s portfolio comprised 99 companies totaling $515.4 million, with a weighted average annualized yield of 12.2%. About 83.3% of its funds are allocated in 1st Lien Senior Secure and 1st Lien “unitranche” securities.
In the 2023 second quarter, total investment income for the quarter came in at $16.3 million, compared to $16.8 million in the previous quarter. The $500,000 decline was primarily the result of a lower average portfolio balance, lower fee income and prepayment gains and the one-time reversal of previously accrued interest income. These factors were offset by higher portfolio yield resulting from the rising rate environment.
Net investment income per share came in at 27 cents, 4 cents lower than last quarter’s 31 cents. The decline was due to lower total investment income. Net asset value (NAV) per share fell 4.4% to $9.84 during the quarter. This was primarily due to net unrealized losses on a couple of specific portfolio companies.
Since Monroe Capital Corporation’s initial public offering (IPO) in 2012, the company has produced stable net investment income per share, maintaining a robust relationship between its investment yields and financing costs. Performance remained resilient even during 2020, a year of significant challenges, assisted by management’s fee waivers, which showcased prudent investments.
Monroe’s dividend is adequately covered by the company’s net investment income generation. The company’s qualities include a well-diversified portfolio of companies with a robust investment yield and a prudent management team.
MRCC yields 14%.
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.
