3 Business Development Companies With Dividend Yields Over 5%

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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, 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.

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 US. The fund provides primarily first-lien senior secured loans, mezzanine debt, non-control structured equity and common equity. As of its latest filings, Sixth Street’s portfolio includes 136 investments, with no company making up more than 2.6% of its net assets. The company has assets worth about $3.3 billion and is based in San Francisco, California.

On February 15th, 2024, Sixth Street Specialty Lending reported its Q4 results for the period ending December 31st, 2023. For the quarter, net investment income came in robust at $54.7 million, up 4% year-over-year. However, NII/share was $0.62, three cents lower year-over-year due to a higher share count. NAV rose by 30.4% to $17.04 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 80 bps year-over-year to 14.2%.

Further, TSLX’s weighted average interest rate of debt rose by 240 bps to 7.8%. Finally, SOFR was higher as well due to the ongoing hikes in interest rates. All variables combined led to the company’s weighted average spread over all floating rate investments falling from 8.7% last year to 8.3%.

For FY2024, we expect NII/share of $2.30. TSLX’s base dividend remains covered by net investment income. TSLX stock currently yields 9.1%.

Oaktree Specialty Lending (OCSL)

Oaktree Specialty Lending Corp. is a BDC that 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.

On February 1st, 2024, Oaktree Specialty Lending Corp. released its first quarter of fiscal 2024 results for the period ending December 31st, 2023. For the quarter, the company reported adjusted net investment income (NII) of $44.2 million or $0.57 per share, as compared with $47.8 million or $0.62 per share in the fourth quarter of fiscal 2023.

The weighted average yield on new debt investments was 11.6%, slightly down from 12.0% in the fourth quarter of fiscal 2023. Total debt outstanding was $1,660 million by the end of the reporting quarter, with a total debt to equity ratio of 1.10x and a net debt to equity ratio of 1.02x, after adjusting for cash and cash equivalents.

The company has been able to increase its yearly dividend payout for 5 consecutive years. Over the last five years, the average annual dividend growth rate is 12.9%. In February 2023, the company increased its quarterly dividend by 1.9% from $0.54 to $0.55 per share.

At present, Oaktree Specialty Lending Corp.’s dividend could be considered relatively safe since the quarterly adjusted investment income of $0.62 covered the quarterly dividend of $0.55. OSCL shares currently yield 11%.

Goldman Sachs BDC (GSBD)

Goldman Sachs BDC is a closed-end management investment company that has elected to be regulated as a BDC (Business Development Company). In 2020, the company merged with Goldman Sachs Middle Market Lending Corp. Post-merger GSBD 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.

As of December 31st, 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 28th, 2024, GSBD announced its Q4 and full-year results for the period ending December 31st, 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 (NII) 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.

Goldman Sachs BDC’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 11.7%.

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