This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.
Business development companies, or BDCs, typically have high dividend yields, as they are 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 in the same way other companies are.
That’s good for income investors because dividend yields in the sector are usually above 5%.
This article will discuss 3 BDCs with high dividend yields, which could be attractive for income investors.
Main Street Capital (MAIN)
Main Street Capital Corporation is a BDC that 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.
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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).
In the 2023 second quarter, 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 $0.75 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 $0.78 in Q2 2022. Main Street’s net asset value per share increased 3.1% to $27.69, compared to December 31st, 2022. During the quarter, Main Street Capital announced a 2.2% dividend increase to $0.235 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 6.9%.
Gladstone Investment (GAIN)
Gladstone Investment focuses on US-based small-and medium-sized companies. Industries which Gladstone Investment targets include aerospace & defense, oil & gas, machinery, electronics, and media & 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 August 2, GAIN reported second-quarter financial results. Net investment income came to $0.25 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, 2023.
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, but which 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 earnings-per-share 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 7.6%.
Sixth Street Specialty Lending (TSLX)
Sixth Street Specialty Lending is a specialty finance company focused on providing flexible, fully committed financing solutions to middle-market companies principally located in the U.S. The fund provides primarily first-lien senior secured loans, mezzanine debt, non-control structured equity and common equity. Management aims to co-invest with other firms to maximize the potential for organic growth, acquisitions, market or product expansion, restructuring initiatives, recapitalizations and refinancing.
As of its latest filings, Sixth Street’s portfolio includes 130 investments, with no company making up more than 2.5% of its net assets. Additionally, the portfolio aims to achieve adequate industry diversification, with Internet Services, Business Services, and Human Resource Support Services, accounting for 15.7%, 15.6% and 11.8% of its exposure, respectively, amongst 14 other industries.
In the 2023 second quarter, net investment income came in robust at $48.8 million, up 19.6% year-over-year. Net investment income per share was $0.58, five cents higher year-over-year, while NAV rose by 2.9% to $16.74 compared to the previous quarter. The rise in investment income was due to a larger portfolio of companies and a higher weighted average total yield on debt, which rose by 320 bps year-over-year to 14.1%.
For FY2023, we expect NII/share of $2.20. Along with its base quarterly dividend of $0.46, a supplemental dividend of $0.06 per share was declared. The company has been performing well so far, actively growing its NII/share and dividend while holding a diversified portfolio of investments.
At its current state, TSLX’s base dividend remains covered by net investment income. The company has never cut its base dividend. With a 2023 expected payout ratio of 84%, the dividend looks secure barring a steep decline in net investment income. TSLX’s base dividend currently yields 4.6%.
