Business Development Companies, commonly known as BDCs, are highly popular in the community of income-oriented investors. They are closed-end investment firms which make debt or equity investments in other companies, which cannot borrow funds from traditional channels, such as banks. BDCs invest at least 70% of their assets in companies with a market capitalization below $250 million and are attractive candidates for income-oriented investors thanks to the above-average dividends they offer. In this article, we will discuss the prospects of three BDCs that are offering high dividend yields right now.

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Monroe Capital Corporation (MRCC)

Monroe Capital Corporation is a specialty finance company focused on providing financing solutions primarily to lower middle-market companies in the U.S. and Canada. It is externally managed by Monroe Capital and invests mostly in senior and unitranche secured loans ranging between $2.0 million and $25.0 million.

The portfolio of the company currently comprises 97 companies, with a total nominal value of securities of $553 million and a weighted average annualized yield of 7.9%. Approximately 85% of the funds are allocated in 1st Lien Senior Secure and 1st Lien unitranche securities, while equities account for just about 8% of its portfolio. In reference to the industry exposure of the portfolio, financial companies, business services, and high-tech companies account for 16%, 13.3%, and 10.9% of the portfolio, respectively.

While most BDCs are characterized by volatile performance, Monroe Capital has proved one of the most reliable players in this sector, with remarkable consistency over the last decade. Even in 2020, which was marked by the fierce recession caused by the pandemic, the company grew its net investment income per share 2%, partly thanks to the fee waivers of its management, which proved exemplary with this move.

Moreover, Monroe Capital is currently offering an exceptional dividend yield of 9.2%. The quarterly dividend was slashed by 29% in 2020 due to the pandemic but only as a precautionary measure against the pandemic. Monroe Capital had a payout ratio of 76% in 2020 and currently has a healthy payout ratio of 69%. As a result, the 9.2% dividend of the stock has a wide margin of safety for the foreseeable future, particularly given the reliable performance of the company.

Owl Rock Capital Corporation (ORCC)

Owl Rock Capital Corporation invests and lends funds to U.S. middle-market companies that generate annual EBITDA between $10 million and $250 million and/or annual revenues of $50 million to $2.5 billion at the time of investment. The company has a market capitalization of $5.8 billion and hence it is currently the second-largest publicly traded BDC.

Owl Rock Capital currently benefits from the prevailing environment of low-interest rates. As the weighted average total yield of its debt and income-producing securities stands at 7.9%, the weighted average interest margin of the portfolio is 6.5%, which is certainly a healthy level.

Due to the recent surge of inflation to multi-year highs, the Fed has stated that it will begin raising interest rates quite aggressively this year. While this move may initially provide a headwind to the interest margin of Owl Rock Capital, the company will probably be able to offset this headwind by charging a higher interest rate to its customers.

Moreover, Owl Rock Capital is currently offering a dividend yield of 8.4%. However, it has a payout ratio of 102%, which leaves a thin margin of safety for the dividend. In addition, the company has a more volatile performance record than Monroe Capital. Therefore, its dividend is not as secure as that of Monroe Capital.

Newtek Business Services (NEWT)

Newtek Business Services is a BDC that specializes in providing financial and business services to the small and medium-sized business market in the U.S. Newtek is a unique BDC in that a material portion of its income is derived from subsidiaries that provide a wide array of business services to its large client base. The company also generates a significant amount of its income from issuing SBA (Small Business Administration loans), which only very few BDCs are licensed to issue.

Newtek has been one of the fastest-growing BDCs, as it generates a material portion of its revenue from its SBA activities. Since the government has been willing to support the companies that need these loans, especially in the ongoing coronavirus crisis, it provides a tailwind to the business of this BDC. It is also important to note that the government guarantees a portion of the SBA loans (about 70-75%). As a result, Newtek enjoys higher safety standards than most traditional BDCs.

Newtek is currently offering a 9.7% dividend yield. Unfortunately, its payout ratio stands at 95%, and hence it provides a thin margin of safety for the dividend. However, the company has proved remarkably resilient throughout the pandemic. Given this resilience and the superior safety standards of this BDC, the stock is likely to reward income-oriented investors who purchase the stock at its current price. Notably, the company cut its annual dividend by 5% in 2020 due to the pandemic but it raised its dividend by 54% last year, from $2.05 to a record level of $3.15.

Final Thoughts

BDCs offer above-average dividend yields and hence they are great candidates for the portfolios of income-oriented investors. However, most of them are highly vulnerable to recessions, as many of their customers usually suffer during rough economic periods. Therefore, investors should perform their due diligence carefully and select only the BDCs which have proved resilient to recessions.