3 High Dividend BDCs With Yields Over 10%
Income investors in search of yield should consider the business development company landscape.
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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, are not allowed to retain earnings in the same way as traditional companies. As a result, BDCs are generally more appealing for income investors because dividend yields in the BDC landscape are usually above 5%.
In some cases, BDC yields can reach double-digits.
To be sure, BDCs also carry elevated risk factors, such as economic sensitivity that could result in dividend reductions during recessions.
These names all have high dividend yields above 10%, which could be attractive for income investors.
A 'Stell'ar Double-Digit Yield
Stellus Capital Investment Corp. SCM is BDC that bills itself as a flexible source of capital for the middle market. The company provides capital solutions to companies with $5 million to $50 million of EBITDA and does so with a variety of instruments, the majority of which are debt. Stellus provides first lien, second lien, mezzanine, convertible debt, and equity investments to a diverse group of customers, generally at high yields, in the U.S. and Canada.
The company posted fourth-quarter and full-year earnings on March 4, and results were somewhat mixed. The BDC posted fiscal year adjusted net investment income of $1.92, which beat estimates by 19 cents. Total investment income, which is akin to revenue, was up 41% year over year to $106 million, and missed estimates by over $5 million. The company noted that its loan portfolio is yielding 11.9% as of the end of the year.
Base management fees totaled $15.5 million, up slightly from $14.8 million a year ago. Net investment income was $42.2 million, up from $28.6 million in 2022. The company’s investment portfolio had a net change in unrealized appreciation of $2.8 million, which was a huge improvement over 2022’s decline of nearly $18 million.
Stellus has reset much of its investment portfolio with higher rates, leading to a very strong portfolio yield. However, a possible headwind to this is interest rates declining off of currently elevated levels. The company’s net assets continue to grow over time, but these gains have been largely offset by a rising share count.
SCM is expected to distribute just over 90% of its NII as dividends for 2024.
SCM stock currently yields 11.8%.
'Lien' on This BDC for Yield
Monroe Capital Corp. MRCC is a specialty finance company focused on providing financing solutions primarily to lower middle-market companies in the United States and Canada. It is externally managed by Monroe Capital. The company primarily invests in senior and “unitranche” secured loans ranging between $2.0 million and $25.0 million each.
As of December 31, 2023, the company’s portfolio comprised 96 companies totaling $488.4 million, with a weighted average annualized yield of 12.1%. About 82.4% of its funds are allocated in 1st Lien Senior Secure and 1st Lien “unitranche” securities.
On March 11, MRCC reported its Q4 and full-year results. Total investment income for the quarter came in at $15.5 million, compared to $15.6 million in the previous quarter. The weighted average portfolio yield fell during the quarter, from 12.4% to 12.1%, though it remained rather high as a result of an elevated interest rates environment. A lower number of portfolio companies also impacted total investment income.
Net investment income per share came in at $0.24, one cent lower from last quarter’s $0.25. The decline was due to lower total investment income. For the year, NII per share came in at $1.07. Net asset value per share fell 1.9% to $9.40 during the quarter, primarily due to net unrealized losses on a couple of specific portfolio companies.
Being a business development company of modest size, the company does not enjoy any noteworthy competitive advantage other than the experience of its investment advisor, Monroe Capital, whose senior management averages more than 30 years of experience, overseeing around $18.4 billion in assets under management.
Since MRCC's IPO in 2012, the company has produced stable net investment income per share. Performance remained resilient even during 2020, a year of significant challenges, assisted by management’s fee waivers. MRCC lowered its quarterly dividend during the pandemic from $0.35 to $0.25 as a precautionary measure. We do not project any dividend growth ahead amid little to no room for dividend hikes at the moment, although shares yield over 14% currently.
We are also expecting NII/share to remain rather stable in the medium term, as even if NII/share grows slightly moving forward.
MRCC stock currently yields 14.2%.
Stable Results and a Safe Dividend
Goldman Sachs BDC GSBD is a closed-end management investment company. GSBD provides specialty finance lending to U.S.-based middle-market companies, which generate EBITDA in the range of $5 million-$200 million annually, primarily through “unitranche” first-lien loans. The company will usually make investments that have a maturity between three and 10 years and in size between $10 million and $75 million.
As of December 31, 2023, GSBD’s portfolio comprised 144 companies with a fair value of around $3.41 billion. The investment portfolio was comprised of 97.2% senior secured debt, including 95.3% in first lien investments. The portfolio’s amortized yield at cost comes in at 11.8%.
On February 28, GSBD announced its Q4 and full-year results for 2023. For the three-month period, the company achieved a total investment income of $115.4 million, compared to $120.1 million in the previous quarter.
The decrease in investment income was mainly driven by a decline in repayments and the related accretion of discounted positions. Net investment income also declined from $72.9 million in Q3 to $61.8 million in Q4. On a per-share basis, NII came in at $0.56, down from $0.67 in the previous quarter.
Since 2015, when GSBD went public, the company has been producing very stable results. While its portfolio yield may be inferior to industry peers, who often enjoy yields in the low double-digits, the company has maintained a robust investment spread.
GSBD’s dividend could be considered relatively safe, since the company has maintained its current $1.80 rate for years, adequately covered by its net investment income generation.
GSBD stock currently yields 11.8%.
At the time of publication, Ciura had no positions in any stocks mentioned.