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By Bob Ciura, BarChart.com
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.
This article will discuss 3 BDCs with high dividend yields, which could be attractive for income investors.
Monroe Capital Corp. (MRCC)
Monroe Capital Corporation is a specialty finance company focused on providing financing solutions primarily to lower middle-market companies in the United States and Canada.
The company primarily invests in senior and “unitranche” secured loans ranging between $2.0 million and $25.0 million each. It generates about $64 million annually in total investment income and is headquartered in Chicago, Illinois.
As of March 31st, 2024, the company’s portfolio included 98 companies totaling $500.9 million, with a weighted average annualized yield of 11.9%. About 81.9% of its funds are allocated in 1st Lien Senior Secure and 1st Lien “unitranche” securities.
On May 8th, 2024, Monroe Capital Corporation reported its Q1 results for the period ending March 31st, 2024. Total investment income for the quarter came in at $15.2 million, compared to $15.5 million in the previous quarter. The weighted average portfolio yield fell during the quarter, from 12.1% to 11.9%, though it remained rather high as a result of an elevated interest rates environment.
A slightly higher number of portfolio companies, which grew from 96 to 98 also impacted total investment income. Net investment income per share came in at $0.25, stable from last quarter’s $0.25. Net asset value (NAV) per share fell by ten cents to $9.30 during the quarter, primarily due to net unrealized losses on a couple of specific portfolio companies.
We are also expecting NII/share to remain rather stable in the medium term, as even if NII/share grows slightly moving forward, the possibility of a lower investment yield later cannot be ignored, and hence it has to be accounted for. The share count should continue to grow moving forward as Monroe continues to issue equity to fund its investments.
MRCC currently yields 13.3%.
Oaktree Specialty Lending (OCSL)
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 31st, 2024, the investment portfolio accounted for $3.0 billion at fair value diversified across 151 portfolio companies, with a focus on Software (19.0% of portfolio), Health Care Providers & Services (5.9%), and Commercial Services & Supplies (5.6%). The company was founded in 1995, has 1,100 employees, and is headquartered in Los Angeles, California.
On April 30th, 2024, Oaktree Specialty Lending Corp. released its second quarter of fiscal 2024 results for the period ending March 31st, 2024. For the quarter, the company reported adjusted net investment income (NII) of $44.7 million or $0.56 per share, as compared with $44.2 million, or $0.57 per share, in the first quarter of fiscal 2024.
The slight increase in earnings was primarily driven by lower Part I incentive fees, professional fees, and interest expense, though partially offset by a decrease in adjusted total investment income. The weighted average yield on new debt investments was 11.1%, down from 11.6% in the first quarter of fiscal 2024. Total debt outstanding was $1,680 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.
New debt investment originations totaled $395.6 million during the quarter. The debt-to-equity ratios indicate a conservative capital structure, maintaining financial flexibility. The management expresses confidence in the company's strategic positioning and its ability to navigate current market conditions. They remain focused on generating strong returns for shareholders, highlighted by the announced reduction in the base management fee from 1.50% to 1.00% of assets.
OCSL currently yields 11.7%.
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TriplePoint Venture Growth BDC (TPVG)
TriplePoint Venture Growth BDC Corp provides capital and guides companies during their private growth stage, before they eventually IPO to the public markets. TPVG offers debt financing to venture growth companies, proposing a less dilutive way to raise capital than raising additional equity while also helping with the businesses’ acceleration and expansion.
Its investment portfolio mainly consists of debt provision in 49 companies (90% of total portfolio’s fair value), and $71.9 million (10%) of warrants and equity investments with 105 companies. It is well-diversified amongst 20+ industries, with its highest exposure of 17.5 % in consumer products and services. The majority of its funds are allocated in the tech sector.
On May 1st, 2024, the company posted its Q1 results for the period ending March 31st, 2024. For the quarter, total investment income of $29.3 million compared to $33.6 million in Q1-2023. The decrease in total investment was primarily due to a lower weighted average principal amount outstanding on the BDC’s income-bearing debt investment portfolio.
Specifically, the number of portfolio companies fell from 59 last year to 49. Nonetheless, the company’s weighted average annualized portfolio yield came in at an impressive 15.4% for the quarter, up from 14.7% in the prior-year period. Also, during Q1, the company funded $13.5 million in debt investments to three portfolio companies with a 14.3% weighted average annualized yield at origination. Net investment income (NII) per share was $0.41, compared to $0.53 in Q1-2023.
Distributions should remain covered by the company’s increase in net assets. Also, the estimated undistributed taxable earnings from net investment income currently stand at $1.12 per share. Hence, we don’t expect a cut. That being said, due to their obligatory distribution requirements, there is little to no margin for capital maneuverings. TPVG stock currently yields 19%, indicating a higher-risk, higher-reward BDC.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes.
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