One particular group of equities that can be highly interesting for income investors are the business development companies or BDCs. Business development companies are unregistered, closed-end investment companies that primarily invest in small and medium-sized businesses. 

BDCs return most of their profits to shareholders which leads to attractive dividend yields for investors, while it allows BDCs to avoid corporate taxes at the same time. In this report, we will take a look at three high-yield BDCs that look attractive at current prices.

1: Gladstone Investment Corporation

Gladstone Investment (GAIN) is a BDC that primarily invests in small and mid-sized companies in the aerospace & defense, oil & gas, machinery, electronics, and media & communications industries. It was founded in 2005 and has delivered solid earnings and income growth since. Since Gladstone Investment pays out the majority of its profits via dividends, there is not a lot of earnings being redeployed into the business.

But since Gladstone Investment does not only offer loans, typically in the $5 million to $30 million range, but also takes equity stakes in some of the companies it invests in, its equity portfolio gains in value over time. This strategy allowed Gladstone Investment to grow its book value over the years, despite paying out most of its reported net investment income to the company's owners.

Gladstone Investment reported its second quarter (Q2 2023 ended September 30) earnings results in November. The company generated total investment income - Gladstone Investment’s revenue equivalent - of $20.3 million during the quarter, which represents a decline of 3% compared to the prior quarter.

At current prices, Gladstone Investment is trading with a dividend yield of 6.5%, which is attractive relative to what investors can get from most other investments. 

2: Oxford Square Capital (OXSQ)

Oxford Square Capital Corp. is a BDC (Business Development Company) specializing in financing early and middle-stage businesses through loans and CLOs. The company holds an equally split portfolio of First-Lien, Second-Lien, and CLO equity assets spread across 7 industries, with the highest exposure in software and business services, at 39.3% and 21.6%, respectively. The company’s assets have a gross investment value of $285.5 million in 58 positions, with 68% of debt securities being secured. OXSQ generates around $43 million in annual interest payments and is based in Greenwich, Connecticut. 

On November 7th , 2023, Oxford Square reported its Q3 results for the period ending September 30th, 2023. For the period, the company generated approximately $13.0 million of total investment income, down 3.7% from the previous quarter. The decline in investment income was due to a smaller investment portfolio, offset by rising interest rates. Specifically, the weighted average yield of the debt investments came in at 13.1% at current cost, compared to 12.8% during Q2- 2023. This increase was further bundled with a higher cash distribution yield from OXSQ’s CLO equity investments, which grew from 18.4% to 20.1% sequentially. Total expenses, which primarily include interest paid on its own financing and managers’ fees, amounted to $6.6 million, $0.2 million lower than Q2-2023. Due to lower investment income, NII (the net investment income) amounted to $6.4 million, down $0.3 million sequentially. On a per-share basis, NII came in at $0.11. Net asset value (NAV) per share was $2.78 compared to $2.88 last quarter. 

OXSQ’s payout ratio has often been above 100% over the years, as management has historically paid investors more than what the company earned. While the stock’s distribution yield has been seemingly attractive over the years, the company has been wiping an equal, and sometimes higher, amount from its NAV. Such a strategy could be sustained only via a gradually increased interest income.

OXSQ yields 14%.

3: Main Street Capital Corporation (MAIN)

Main Street Capital (MAIN) is one of the most widely owned BDCs among retail income investors, thanks to its strong dividend growth track record and its monthly dividend payments. The BDC has a market capitalization of $3 billion, which means that it is not among the largest BDCs, yet is well-known for its size.

Main Street Capital invests in more than 100 different lower middle market and middle-market companies, with an additional 70+ private loan investments being placed. Main Street Capital's investments are thus well-diversified across a wide range of portfolio companies.

On November 1st, 2023, Main Street Capital announced a 2.1% dividend increase to $0.24 per share paid monthly. The same day, it also reported third quarter 2023 results. Net investment income of $82.2 million for the quarter was a 32% increase compared to $62.4 million in Q3 2022. 

The corporation generated net investment income per share of $0.99, up 19% year-over-year from $0.83 per share. Distributable net investment income per share totaled $1.04, up 18% from $0.88 in Q3 2022. Main Street’s net asset value per share increased compared to December 31st, 2022, from $26.86 to $28.33, a 5.5% increase.

Main Street Capital has a somewhat complicated dividend policy, as monthly dividends are combined with quarterly special dividend payments that vary in size. When we exclude special dividend payments, as those are not guaranteed at a specific size, the dividend yield is still quite attractive, at 6.5%.