HomeMost PopularGenerating Passive Income: Exploring Well-Covered Yields From the 5 Largest BDCs

Generating Passive Income: Exploring Well-Covered Yields From the 5 Largest BDCs

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When it comes to passive income, Business Development Companies (BDCs) present a promising opportunity for investors. These companies primarily invest in diversified portfolios of senior secured debt, which feature floating interest rates. Investing in BDCs can serve as a diversifier in a portfolio, especially when compared to high yield investments that can be affected by rising interest rates, such as REITs, utilities, and midstream infrastructure.

In this article, we will focus on the five largest BDCs by market capitalization, assessing their potential value as investment options. These companies offer attractive dividend yields ranging from 7% to 13%, with strong coverage ratios.

1. Ares Capital (ARCC) – A Solid Choice

Ares Capital, the leading BDC, impresses with its strong performance in Q2. Its core earnings per share reported a substantial year-over-year increase of 26%, driven primarily by higher interest rates. With GAAP earnings per share at $0.61 and a well-covered dividend of $0.48, ARCC boasts a sturdy coverage ratio of 1.19x. Moreover, its Net Asset Value (NAV) per share continues to grow, and its leverage ratio demonstrates a solid investment grade balance sheet. With these factors in mind, and a dividend yield of 10.1%, ARCC is an appealing blue-chip BDC with a promising outlook.

2. FS KKR Capital Corp (FSK) – A Compelling Investment Opportunity

FS KKR Capital Corp, the second largest BDC, stands out for several reasons. Despite a slight sequential dip in NAV per share, FSK’s net investment income per share has improved, providing a healthy coverage ratio for the regular and total dividends. FSK maintains a solid balance sheet, an investment grade credit rating, and is well-positioned to weather potential economic downturns. Furthermore, FSK’s underwriting quality continues to improve, with a declining non-accrual rate. With a dividend yield of over 13%, strong underwriting performance, and solid fundamentals, FSK has the potential to deliver exceptional returns to shareholders.

3. Blue Owl Capital Corporation (OBDC) – Strong Performance and Attractive Dividend

Blue Owl Capital Corporation has seen consistent growth in net investment income, translating into increased cash distributions for shareholders. The company’s underwriting performance has been solid, with a low non-accrual rate. OBDC also offers a conservative coverage ratio for its regular dividend and is trading at a discount to NAV. With a regular dividend yield of 9.8% (enhanced by special dividends) and an attractive valuation, OBDC presents an appealing investment opportunity.

4. Blackstone Secured Lending Fund (BXSL) – Growing Net Investment Income

Blackstone Secured Lending Fund has been experiencing impressive growth in net investment income per share, thanks to rising interest rates. While providing a significant dividend, BXSL maintains a reasonable leverage ratio and invests primarily in senior secured debt. Its exceptional underwriting performance, reflected in an extremely low non-accrual rate, contributes to the security of its dividend. With these factors in mind, BXSL demonstrates potential for attractive returns.

5. Main Street Capital (MAIN) – A Strong Track Record and Growth

Main Street Capital boasts an impressive history of total return and dividend growth. Its performance in Q2 sets new records for net investment income, distributable net investment income, and Net Asset Value per share. With a diversified portfolio and a focus on lower middle market companies, MAIN has maintained a low non-accrual rate. It benefits from internal management, which ensures an efficient cost structure. Although MAIN’s dividend yield may be relatively low compared to others, its reliable track record, strong underwriting performance, and secure dividend coverage make it an attractive option for conservative investors.

Conclusion: A Diverse Dividend Portfolio with BDCs

Overall, these five BDCs offer investors an excellent opportunity to access secure sources of passive income. They provide tax advantages, high dividend yields, solid balance sheets, and diversified portfolios. Our top pick among these BDCs is FS KKR Capital Corp, given its attractive discount to NAV and leading dividend yield. However, each of these BDCs has its unique strengths that make them potential candidates for a diversified dividend portfolio.

By investing in BDCs, investors can not only generate passive income but also hedge against rising interest rates. These BDCs offer a compelling way to tap into lucrative income sources while ensuring portfolio stability.

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