Business Development Companies (i.e., "BDCs") (BIZD) are great income vehicles as they offer investors some of the highest dividend yields in the market and support these yields with relatively stable cash flows thanks to the fact that this sector invests primarily in senior secured loans. Moreover, they provide a bit of a hedge against rising interest rates since most of these loans are floating rates.
While I certainly have my fair share of concerns about investing in the sector right now, in the spirit of diversification and uncertain futures, I think it still makes sense for income-focused investors to hold some BDCs in their portfolios right now. In this article, I will share what I think are the five best BDCs to hold for passive income rather than a pure focus on total returns.
#1. Blackstone Secured Lending Fund (BXSL)
I believe that BXSL has the best all-around dividend in the BDC space. This is because it combines a very attractive 10% dividend yield that is higher than what is offered by most of its peers with a very strong recent dividend growth momentum, and also has one of the potentially safest dividends in the sector due to its ~98% exposure to first-lien loans. It also has one of the lowest non-accrual rates in the industry, an investment-grade balance sheet, conservative leverage ratio, substantial liquidity, well-managed debt maturity profile, robust dividend coverage ratio of 1.25x in Q4, and skilled external management by the world's largest alternative asset manager Blackstone (BX).
#2. Golub Capital BDC (GBDC)
GBDC is another very attractive BDC dividend stock given its very attractive 9.8% dividend yield that is well-covered by net investment income. It has 94% exposure to first lien senior secured loans, an investment grade balance sheet with substantial liquidity and well-laddered maturities, and strong underwriting performance with 85.9% of its portfolio performing at or above expectations and non-acccruals of only 1.1% of investments on a fair value basis, and significant diversification with an average investment position size that is roughly half that of its peer average. Perhaps best of all, GBDC's fee structure was recently improved to give it one of the highest hurdle rates in the industry and strong alignment with manager and lifetime cumulative incentive fee lookback.
#3. Oaktree Specialty Lending (OCSL)
OCSL's strongest trait is its manager: Oaktree. This company was founded and is still largely run by one of the world's all-time great credit investors in Howard Marks. Moreover, Oaktree's recent merger with Brookfield (BN)(BAM) - the world's second-largest alternative asset manager - provides it with access to even better deal flow and proprietary data.
Oaktree's skill has been evidenced by strong dividend growth and overall improved performance for OCSL since they took over the management of the fund a number of years ago. While the company recently saw a spike in non-accruals, it had a stellar underwriting performance before then and management believes strongly that these are short-term one-off issues that will be resolved. Meanwhile, the portfolio has 86% exposure to senior-secured loans, giving it a conservative profile and has a 12.2% weighted average yield on its debt investments and a very attractive 11.42% dividend yield that is well-covered by net investment income.
#4. Blue Owl Capital Corp. (OBDC) & Blue Owl Capital Corp. III (OBDE)
OBDC and its close peer OBDE are also great dividend stocks in the BDC sector, thanks to their attractive 9.6% and 9.1% respective dividend yields. They also have 82.1% and 88.4% exposure to senior-secured loans, respectively, and have achieved very strong underwriting performance thus far thanks to the skill of their manager Blue Owl (OWL).
These BDCs also have investment grade balance sheets with moderate leverage and plenty of liquidity. Last, but not least, they implement a prudent combination of base quarterly dividends and supplemental dividends that leave the base quarterly dividends very well covered by net investment income.
A final aspect that is very attractive about OBDC and OBDE is that they still trade at a discount to NAV (though this has been closing over time), contrasting with all of the other BDCs in this list as they trade at premiums to NAV.
#5. Ares Capital (ARCC)
Last, but not least, ARCC is one of the top blue chip BDCs thanks to its stellar long-term track record of delivering consistent dividend payments through good times and bad and generating market-crushing long-term total return performance:
While its individual metrics are not particularly compelling relative to peers (in particular, its relatively low 65.1% exposure to senior secured loans), its impressive track record, solid investment grade balance sheet, strong underwriting performance, and well-covered 9.6% dividend yield are all quite good for a BDC with the largest market capitalization in the industry by far. Moreover, many investors buy this stock purely because of its attractive current dividend that has an impressive track record for being durable and because they trust management so much due to the company's phenomenal track record and the skilled underwriting of Ares Management Corporation (ARES).
Honorable Mention
While its relatively low (though still strong) 6.3% dividend yield keeps it from cracking the top five, an honorable mention goes to Main Street Capital (MAIN) due to its very impressive track record of delivering even better long-term total returns than ARCC has, its strong balance sheet, well-aligned internal management, strong underwriting performance, skilled capital allocation track record, and powerful combination of dividend yield, dividend growth, and special distributions over time.
Investor Takeaway
Overall, the BDC sector does not look terribly opportunistic at the moment given the soaring competition in the sector, weakening fundamentals due to declining economic conditions and rising non-accruals overall in the sector, and generally bloated BDC valuations relative to recent history.
That being said, for income investors looking to build out a well-diversified portfolio, there are still several attractive passive income generators in the sector, including the six mentioned in this article.
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