These 3 Investments Can Deliver High Dividends Thanks to Special Tax Rules
Business development companies, or BDCs, carry some risk along with high-dividend yields.
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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%.
To be sure, BDCs also carry elevated risk factors. This article will discuss three BDCs with high-dividend yields, which could be attractive for income investors.
1. Main Street Capital (MAIN)
Main Street Capital Corporation MAIN 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.
As of the end of the second quarter 2024, the corporation had aggregate liquidity of $946 million, consisting of $31 million in cash and cash equivalents, and $915 million of unused capacity under the revolving credit facility.
At the end of Q2 2024, Main Street had an interest in 83 lower-middle market companies (valued at $2.4 billion), 19 middle-market companies ($184 million) and 92 private loan investments ($1.7 billion). On May 7, 2024, Main Street Capital announced a 2.1% dividend increase to $0.245 per share paid monthly.
On August 8, 2024, Main Street Capital reported second quarter 2024 results. Net investment income of $87.3 million for the quarter was a 2% increase compared to $85.7 million in Q2 2023. The corporation generated net investment income per share of $1.01, down 5% year-over-year from $1.06 per share. Distributable net investment income per share totaled $1.07, down 4% from $1.12 in Q2 2023.
Main Street’s net asset value per share increased compared to December 31, 2023, from $29.20 to $29.80, a 2.1% increase. The corporation declared monthly dividends of $0.245 to be paid in the fourth quarter of 2024, which are 4.3% higher than those declared a year ago, as well as a supplemental $0.30 dividend to be paid in September.
2. Monroe Capital (MRCC)
Monroe Capital Corporation 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 June 30, 2024, the company’s portfolio included 94 companies totaling $485.8 million, with a weighted average annualized yield of 11.9%. About 81.1% of its funds are allocated in 1st Lien Senior Secure and 1st Lien “unitranche” securities.
On August 7, 2024, Monroe Capital Corporation reported its Q2 results for the period ending June 31, 2024. Total investment income for the quarter came in at $15.6 million, compared to $15.2 million in the previous quarter. The weighted average portfolio yield remained stable during the quarter, standing at 11.9%.
Nevertheless, a lower number of portfolio companies, which fell from 98 to 94, negatively impacted total investment income. Net investment income per share came in at $0.30, up from last quarter’s $0.25. Net asset value (NAV) per share fell by 10 cents to $9.20 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 Monroe Capital Corporation’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.
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 over 12%.
3. Goldman Sachs BDC (GSBD)
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 to $200 million annually, primarily through “unitranche” first-lien loans. The company will usually make investments that have a maturity between three and ten years and in size between $10 million and $75 million.
As of June 30, 2024, GSBD’s portfolio included 155 companies at a fair value of nearly $4.0 billion. The investment portfolio was comprised of 98% senior secured debt, including 96.9% in first-lien investments. Its amortized yield at cost comes in at 12.3%. GSBD’s investments are well-diversified, with software, healthcare providers and professional services accounting for 17.7%, 11.4% and 9.2% of its total portfolio, respectively.
On August 8, 2024, GSBD announced its Q2 results for the period ending June 30, 2024. For the three-month period, the company achieved a total investment income of $108.6 million, compared to $111.5 million in the previous quarter.
The decrease in total investment was primarily due to investments being placed on non-accrual status as a result of underperformance during the quarter. Net investment income (NII) rose from $60.8 million in Q1 to $67.0 million in Q2. On a per-share basis, NII came in at $0.59, up from $0.55 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 securities mentioned.