Updated on June 17th, 2023 by Bob Ciura

Business Development Companies, otherwise known as BDCs, are highly popular among income investors. BDCs widely have high dividend yields of 5% or higher.

This makes BDCs very appealing for income investors such as retirees. With this in mind, we’ve created a list of BDCs.

You can download your free copy of our BDC list, along with relevant financial metrics such as P/E ratios and dividend payout ratios, by clicking on the link below:

Of course, before investing in BDCs, investors should understand the unique characteristics of the sector.

This article will provide an overview of BDCs. It will also list our top 5 BDCs right now as ranked by expected total returns in The Sure Analysis Research Database.

Table Of Contents

The table of contents below provides for easy navigation of the article:

Overview of BDCs

Business Development Companies are closed-end investment firms. Their business model involves making debt and/or equity investments in other companies, typically small or mid-size businesses.

These target companies may not have access to traditional means of raising capital, which makes them suitable partners for a BDC. BDCs invest in a variety of companies, including turnarounds, developing, or distressed companies.

BDCs are registered under the Investment Company Act of 1940. As they are publicly-traded, BDCs must also be registered with the Securities and Exchange Commission.

To qualify as a BDC, the firm must invest at least 70% of its assets in private or publicly-held companies with market capitalizations of $250 million or below.

BDCs make money by investing with the goal of generating income, as well as capital gains on their investments if and when they are sold.

In this way, BDCs operate similar business models as a private equity firm or venture capital firm.

The major difference is that private equity and venture capital investment is typically restricted to accredited investors, while anyone can invest in publicly-traded BDCs.

Why Invest In BDCs?

The obvious appeal for BDCs is their high dividend yields. It is not uncommon to find BDCs with dividend yields above 5%. In some cases, certain BDCs provide 10%+ yields.

Of course, investors should conduct a thorough amount of due diligence, to make sure the underlying fundamentals support the dividend.

As always, investors should avoid dividend cuts whenever possible. Any stock that has an abnormally high yield is a potential danger.

Indeed, there are multiple risk factors that investors should know before they invest in BDCs. First and foremost, BDCs are often heavily indebted. This is commonplace across BDCs, as their business model involves borrowing to make investments in other companies. The end result is that BDCs are often significantly leveraged companies.

When the economy is strong and markets are rising, leverage can help amplify positive returns. However, the flip side is that leverage can accelerate losses as well, which can happen in bear markets or recessions.

Another risk to be aware of is interest rates. Since the BDC business model heavily utilizes debt, investors should understand the interest rate environment before investing. For example, rising interest rates can negatively affect BDCs if it causes a spike in borrowing costs.

That said, BDCs may benefit from falling interest rates. In the current climate of low interest rates, many BDCs could see a tailwind.

Lastly, credit risk is an additional consideration for investors. As previously mentioned, BDCs make investments in small to mid-size businesses.

Therefore, the quality of the BDC’s portfolio must be assessed, to make sure the BDC will not experience a high level of defaults within its investment portfolio. This would cause adverse results for the BDC itself, which could negatively impact its ability to maintain distributions to shareholders.

Another unique characteristic of BDCs that investors should know before buying is taxation. BDC dividends are typically not “qualified dividends” for tax purposes, which is generally a more favorable tax rate. Instead, BDC distributions are taxable at the investor’s ordinary income rates, while the BDC’s capital gains and qualified dividend income is taxed at capital gains rates.

After taking all of this into account, investors might decide that BDCs are a good fit for their portfolios. If that is the case, income investors might consider one of the following BDCs.

Tax Considerations Of BDCs

As always, investors should understand the tax implications of various securities before purchasing. Business Development Companies must pay out 90%+ of their income as distributions. In this way, BDCs are very similar to Real Estate Investment Trusts.

Another factor to keep in mind is that approximately 70% to 80% of BDC dividend income is typically derived from ordinary income. As a result, BDCs are widely considered to be good candidates for a tax-advantaged retirement account such as an IRA or 401k.

BDCs pay their distributions as a mix of ordinary income and non-qualified dividends, qualified dividends, return of capital, and capital gains.

Returns of capital reduce your tax basis. Qualified dividends and long-term capital gains are taxed at lower rates, while ordinary income and non-qualified dividends are taxed at your personal income tax bracket rate.

Source: Investor Presentation

On May 3rd, 2023, the company posted its Q1 results for the period ending March 31st, 2023. For the quarter, the company achieved a total investment income of $33.6 million compared to $27.3 million in Q1-2021. The increase in total investment was primarily due to a greater weighted average principal amount outstanding on TriplePoint’s incomebearing debt investment portfolio and higher investment yields.

The company’s weighted average annualized portfolio yield during the period came in at 14.7%. Further, the company kept expanding its portfolio in Q1 by funding $56.7 million in debt investments to 11 companies with a 14.1% weighted average annualized portfolio yield at origination. Net investment income (NII) per share was a record $0.53, compared to $0.44 in Q1-2022.

This was due to the increase in net investment income between periods which was, in turn, driven primarily by greater investment and higher investment margins. Based on the company’s current portfolio composition, we forecast a FY2023 NII/share power of $1.90.

Click here to download our most recent Sure Analysis report on TPVG (preview of page 1 of 3 shown below):

BDC #4: Horizon Technology Finance (HRZN)

• 5-year expected annual return: 12.0%

Horizon Technology Finance Corp. is a BDC that provides venture capital to small and medium–sized companies in the technology, life sciences, and healthcare–IT sectors.

The company has generated attractive risk–adjusted returns through directly originated senior secured loans and additional capital appreciation through warrants, featuring a last–nine–month annualized portfolio yield of 14.7%.

Source: Investor Presentation

On May 2nd, 2023, Horizon released its Q1 results for the period ending March 31st, 2023. For the quarter, total investment income grew 97% year-over-year to $28.0 million, primarily due to growth in interest income on investments resulting from an increase in the average size of the debt investment portfolio and an increase in the base rate for most of the company’s variable rate debt investments.

Net investment income per share (ISS) rose to $0.46, 77% higher compared to Q1-2023. Net asset value (NAV) per share landed at $11.34, 1.1% lower sequentially or 2.9% lower year-over-year.

Click here to download our most recent Sure Analysis report on HRZN (preview of page 1 of 3 shown below):

BDC #3: Goldman Sachs BDC Inc. (GSBD)

• 5-year expected annual return: 12.8%

Goldman Sachs BDC provides specialty finance lending to U.S.-based middle-market companies, which generate EBITDA in the range of $5-$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.

On May 4th, 2023, GSBD announced its Q1 results for the period ending March 31st, 2023. For the three-month period, the company achieved a total investment income of $107.4 million, compared to $106.5 million in the previous quarter.

The increase in investment income was primarily driven by an increase in interest rates. However, net investment income (NII) fell from $50.2 million in Q4 to $48.0 million, mainly due to incentive fees skyrocketing by 172% to $22.3. On a per-share basis, NII came in at $0.45, up from $0.65 in the previous quarter.

As of March 31st, GSBD’s portfolio comprised 133 companies with a fair value of around $3.50 billion. The investment portfolio was comprised of 97.4% senior secured debt, including 92.6% in first lien investments.

Click here to download our most recent Sure Analysis report on GSBD (preview of page 1 of 3 shown below):

BDC #2: Great Elm Capital Corp. (GECC)

• 5-year expected annual return: 13.5%

Great Elm Capital Corporation is a business development company that specializes in loan and mezzanine, middle market investments. It seeks to create long–term shareholder value by building its business across three verticals: Operating Companies, Investment Management, and Real Estate.

The company favors investing in media, healthcare, telecommunication services, communications equipment, commercial services and supplies.

Great Elm Capital Corporation released its first quarter results on May 4th. In the first quarter of 2023, the net investment income (NII) of the company increased by 26% to reach $2.8 million, or $0.37 per share. This growth was attributed to strategic capital deployment and a shift towards higher-yielding floating rate investments.

The quarter marked the highest cash income in the company’s history, with only 15% of the total investment income being attributed to PIK (payment-in-kind) and accretion income. The net assets of the company were $90.3 million, or $11.88 per share, on March 31, 2023, compared to $84.8 million, or $11.16 per share, on December 31, 2022.

Click here to download our most recent Sure Analysis report on GECC (preview of page 1 of 3 shown below):

BDC #1: Oaktree Specialty Lending Corp. (OCSL)

• 5-year expected annual return: 18.0%

Oaktree Specialty Lending Corp. is a specialty finance company, or BDC. It provides lending services and invests in small and mid-sized companies. The company’s investment objective is to maximize its portfolio’s total return by generating current income from debt investments, and to a lesser extent, capital appreciation from equity investments.

Its investments generally range in size from $10 million to $100 million and are principally in the form of the first lien, second lien, or collectively, senior secured, and subordinated debt investments, which may also include an equity component made in connection with investments by private equity sponsors.

As of March 31, 2023, the investment portfolio accounted for $3.2 billion at fair value diversified across 165 portfolio companies, with a focus on software (18.2%) and Pharmaceuticals (5.2%).

On May 4th, 2023, Oaktree Specialty Lending Corp. released its second quarter fiscal 2023 results for the period ending March 31st, 2023. For the quarter the company reported adjusted net investment income (NII) of $45.4 million or $0.62 per share, up from $37.1 million or $0.61 per share in the first quarter and $0.53 for the same quarter last year.

The increase was primarily driven by higher interest income resulting from the larger investment portfolio and rising base rates, partially offset by higher interest expense, incentive fees, and operating expenses.

Click here to download our most recent Sure Analysis report on OCSL (preview of page 1 of 3 shown below):

Final Thoughts

Business Development Companies allow everyday retail investors the opportunity to invest indirectly in small and mid-size businesses. Previously, investment in early-stage or developing companies was restricted to accredited investors, through venture capital.

And, BDCs have obvious appeal for income investors. BDCs widely have high dividend yields above 5%, and many BDCs pay dividends every month instead of the more typical quarterly payment schedule.

Of course, investors should consider all of the unique characteristics, including but not limited to the tax implications of BDCs. Investors should also be aware of the risk factors associated with investing in BDCs, such as the use of leverage, interest rate risk, and default risk.

If investors understand the various implications and make the decision to invest in BDCs, the 5 individual stocks on this list could provide attractive total returns and dividends over the next several years.

At Sure Dividend, we often advocate for investing in companies with a high probability of increasing their dividends each and every year.

If that strategy appeals to you, it may be useful to browse through the following databases of dividend growth stocks: