The 2 safest BDC dividends right now

Business Development Corporations, or BDCs, were created in the 1980s by Congress as an investment vehicle that invests in a portfolio of small and medium-sized, mostly private, businesses to stimulate job growth and help emerging businesses grow.

As regulated investment companies, they pay no corporate tax on profits, but they are required by law, like real estate investment trusts (REITs), to pay out at least 90% of their net income in the form of dividends. Because of this requirement, their returns are typically higher than your typical stock, often over 5%. BDCs are popular investments among people looking for passive income, but in this bear market, BDCs are even more popular as investors seek high-yield dividends to offset large losses in their portfolios.

There are about 50 BDC stocks trading in the market, but because they all invest in different companies and sectors, they are all very different. Also, because they invest in small, medium and struggling businesses, they can be risky. But here are two that seem like good, safe options right now.

1. Main Street Capital

Main Street Capital (MAIN 1.64%) invests in a portfolio of approximately 75 different companies, primarily in the lower middle market – those with annual sales between $10 million and $150 million. They provide both private debt and private equity as well as companies across all sectors – industrials, energy, information technology and consumer discretionary being the most represented.

Main Street Capital is coming off a strong first quarter, where net investment income grew 31% and earnings per share rose 26% year-over-year. BDC has generally outperformed its competitors over the years due to its focus on companies with strong competitive advantages, stable cash flows and seasoned management teams. It also prides itself on its long-term investment focus, its relationships with management teams and its one-stop approach to providing capital solutions.

These factors should help it maintain and increase its dividend, as it has for the past 11 consecutive years. Additionally, rising interest rates should boost interest income as 73% of its debt investments have floating rates, Chief Financial Officer Jesse Morris said on the first-quarter earnings call.

When it comes to the dividend, Main Street Capital is a bit unique in that it offers monthly dividend payouts, while most payouts are quarterly. In June, BDC declared an additional dividend of $0.075 per share, on top of the regular payout of $0.215. It also approved dividends of $0.215 per share for July, August and September. This works out to $2.58 per share for the full year and generates a return of 6.33%. And as a safe bet, Main Street Capital has never cut its dividend since going public in 2007.

2. Hercules Capital

Capital of Hercules (HTGC 1.32%) is different from Main Street Capital in that its portfolio consists of growth-oriented, venture capital-backed companies, primarily in the technology, life sciences and renewable technology sectors. It currently has a portfolio of 103 companies, with a focus on providing senior secured venture growth loans.

It has been around since 2003 and has committed over $14 billion to over 570 companies. It is considered one of the leading lenders to entrepreneurs and venture capitalists seeking capital funding. Among those 570 companies was Facebook, today Metaplatforms.

Like Main Street Capital, it had a strong first quarter, with net investment income up 3.7%. More importantly, it has seen record quarterly portfolio growth and record debt and equity commitments, setting it up for continued growth. Additionally, with 94.7% of his portfolio in floating rate fixed income investments, he should generate additional interest income as interest rates rise.

Hercules recently declared a quarterly dividend of $0.33 per share in the second quarter, as well as an additional dividend of $0.15. It pays a high yield of 9.59% with an annual payout of $1.33 per share, not including additional dividends. It has increased its dividend for the past four consecutive years.

Both are well-established BDCs that have developed good track records and reputations in their markets. They should both be safe bets as we head into this rising rate environment.

Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a board member of The Motley Fool. Dave Kovaleski has no position in the stocks mentioned. The Motley Fool holds positions and endorses Meta Platforms, Inc. The Motley Fool has a Disclosure Policy.

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