Favorable tax treatment for these companies translates into high dividend yields for investors.
Business development companies (BDCs) are required to distribute substantially all of their profits (at least 90%) to shareholders, and therefore typically offer high dividend yields.
BDCs receive favorable tax treatment and in return are not allowed to retain profits like other corporations.
As a result, dividend yields in this sector are typically above 5%. In this article, we'll look at three high-dividend-yielding BDCs that may be attractive to income investors.
Main Street Capital (MAIN)
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Main Street Capital (New York Stock Exchange:Major(NYSE: BDC) is a BDC that provides long-term debt and equity capital to middle market companies and provides debt financing to middle market companies. The firm's investments typically support management buyouts, recapitalizations, growth financings, refinancings, and acquisitions.
The company's dividend policy is slightly different from other companies in that in addition to paying a monthly dividend, it also pays additional dividends from time to time if performance is good.
As of the end of the first quarter of 2024, MainStreet had invested in 81 lower-middle market companies valued at $2.4 billion, 22 mid-market companies valued at $239 million, and 88 private loan investments valued at $1.5 billion. In its first-quarter earnings in May, the firm reported net investment income of $89.8 million, up 11% from $81 million in the first quarter of 2023.
MainStreet also announced a 2.1% increase in its monthly dividend to 24.5 cents per share, payable in the third quarter of 2024 (up 6.7% from the amount announced a year ago), as well as an additional dividend of 30 cents to be paid in June. MainStreet shares yield 8.1%, excluding the additional dividend paid.
Looking back even further, from 2013 to 2022, despite the pandemic, Main Street grew its net investment income by an average of 5.3% per year, a solid track record over the past decade.
Gladstone Investments (GAIN)
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Gladstone Investments (Nasdaq:Get) focuses on small and medium-sized companies based in the U.S. Gladstone Investments' investment industries include aerospace and defense, oil and gas, machinery, electronics, and media and communications.
The debt investment position sizes are typically in the range of $5 million to $30 million. The company also acquires equity interests in these companies, and the equity investment position sizes are typically in the range of $10 million to $40 million.
Gladstone Investments released its fourth-quarter earnings results in May, showing that the company generated total investment income (equivalent to revenue) of $23.7 million during the quarter, up 19% from the previous quarter. The figure beat consensus estimates by $500,000, as analysts had expected the company's sales to decline slightly.
Gladstone Investments' fourth-quarter adjusted net investment income per share was 24 cents, up from the prior quarter. Net asset value (NAV) per share ended the quarter at $13.43 per share, also up from the third quarter.
The weighted average yield of this business development company has been very high historically, averaging well above 10%. Gladstone Investment's dividend payout ratio as a percentage of net investment income has been over 100% over the past 10 years. With a projected dividend payout ratio of approximately 95% for 2024, GAIN stock has a yield of 7.0%.
Triple Point Venture Growth (TPVG)
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Triple Point Venture Growth (New York Stock Exchange:TPVG) provides capital and mentorship to companies during their private growth stage before ultimately going public. This includes providing debt financing to venture growth companies, helping them accelerate and scale their businesses while offering a less dilutive form of capital raising than raising additional equity.
The company's investment portfolio is primarily comprised of debt reserves in 49 companies (90% of the total portfolio fair value) and warrants and equity investments of $71.9 million (10%) in 105 companies. It is diversified across more than 20 industries, with the highest percentage being in consumer products and services at 17.5%. The majority of the funds are allocated to the technology sector.
The company's first quarter results showed that total investment income in the quarter was $29.3 million, down from $33.6 million in the same period last year. The decrease in total investments was primarily due to a decrease in the weighted average outstanding principal balance of the BDC's income-generating debt investment portfolio. Specifically, the number of portfolio companies decreased to 49 from 59 last year.
Still, the firm's weighted average portfolio yield was an impressive 15.4% for the quarter, up from 14.7% in the same period last year. Also in the first quarter, the firm made $13.5 million in debt investments in three portfolio companies with a weighted average annual yield at issuance of 14.3%. Net investment income per share was 41 cents, up from 53 cents in the first quarter of 2023.
Dividends should continue to be covered by the company's growing net assets, and we don't expect a cut, as our estimate of undistributed taxable profits from net investment income is currently $1.12 per share. That said, the mandatory dividend requirement leaves little room for capital maneuver. TPVG shares currently yield 19%, making it a riskier, but higher-reward BDC.
As of the publication date of this article, Bob Ciulla does not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are solely those of the author, which is subject to InvestorPlace.com copyright. Publication Guidelines.