Rate hikes are back on the table. For most investors, that’s bad news. But for shareholders in one high-yielding corner of the market, it could be the best thing that’s happened all year.
Own bonds? New issues get more attractive, so your existing ones lose value. Own stocks? Higher rates raise borrowing costs and make bonds more competitive with dividends. Neither is a great setup.
But business development companies (BDCs) have a more complicated relationship with interest rates. In fact, these high-single- and double-digit yielders could get a much-needed spark if Warsh & Co. green-light the first rate hike since 2023.
That’s right: BDCs’ yields are in another league compared to traditional stocks.
Business development companies don’t get much play in traditional financial media. They’re effectively just banks that provide debt and equity capital to companies too small for Wall Street banks to care about. Their portfolios often include dozens if not hundreds of companies, so covering them is like covering an investment fund—not nearly as scintillating as talking about the latest Apple (AAPL) phone or Nvidia (NVDA) chip.
But they’re perfect plays for contrarians like us.
They’re similar to real estate investment trusts (REITs) in that their governing rules require them to pay out at least 90% of their profits as dividends to shareholders. They’re not well-covered or thickly traded, so they frequently trade for premiums or (ideally) discounts to their net asset values, allowing us to buy them on the cheap.
In fact, the four BDCs I’m watching right now not only pay us a ludicrous 11.3% to 14.4%, but we can buy them for as little as 71 cents on the dollar.
Where does the Fed come in?
In the long term, rate hikes and a higher-for-longer environment can weigh on portfolio companies and raise the risk of default. However, BDCs’ financing deals frequently involve floating-rate debt. Their income rises as short-term rates move up, and drops as rates drop, so BDCs could benefit from a modest, short-lived tightening cycle.
Blue Owl Capital Corp. (OBDC)
Dividend yield: 11.3%
Blue Owl Capital Corp. (OBDC), previously known as Owl Rock Capital Corp., is like most BDCs in that they deal with “middle market” companies: not mom-and-pop corner stores, but not major corporations, either. In Blue Owl’s case, its target investment generates annual earnings before interest, taxes, depreciation and amortization (EBITDA) of between $25 million-$500 million, or revenues of between $125 million-$5 billion.
OBDC’s current portfolio is 229 companies wide and spread across 30 industries, only one of which (internet software and services) is weighted at more than 10% at fair value. Its top holdings include the likes of diversified specialty finance firm Wingspire, HOA property management services provider Associa and food manufacturer Winland Foods. It’s a generally defense-minded set of components with high recurring revenues, high switching costs and general resistance to recessions.
Blue Owl’s Portfolio Covers a Lot of Ground
Source: Blue Owl Capital Corp. Q2 Earnings Presentation
OBDC is also typical in that it predominantly deals in debt: Almost 80% of its deal mix is first- and second-lien senior secured debt investments, with the rest spread across unsecured debt, preferred and common equity, specialty finance and joint ventures.
A whopping 96% of its debt investments are floating-rate in nature, which means that if rates rise, Blue Owl Capital Corp.’s portfolio yield should rise right alongside them. That would be welcome news to shareholders, who sustained a 16% dividend cut earlier this year after lower base rates and tightening spreads finally forced OBDC’s hand.
This BDC currently trades at a 20% discount to its net asset value, but what are we buying? On the one hand, even at a reduced 31 cents per share, OBDC’s regular dividend comes out to 11.1%, and a recent 2-cent supplemental adds a few more basis points. Nonaccruals (when the borrower has stopped making payments, usually for at least 90 days) recently improved to a modest 2.0%. Portfolio health looks generally good.
On the other? Blue Owl has struggled to stand out from the BDC pack, and with a conservative portfolio, growth depends almost entirely on what the Fed and economy do next.
MSC Income Fund (MSIF)
Dividend yield: 11.4%
MSC Income Fund (MSIF) is proof that superpowered dividends can come in small sizes. This roughly $600 million BDC is managed by a wholly owned subsidiary of BDC blue chip Main Street Capital (MAIN). Indeed, the company effectively defines itself by its relationship with MAIN, noting that it “differs from Main Street Capital through its private loan-only investment strategy and focus on providing current returns through current dividends.”
MSIF targets smaller companies than Blue Owl Capital Corp., with a preferred annual EBITDA of between $7.5 million-$50 million and revenues between $25 million-$500 million. These target companies are also usually owned by or being acquired by a private equity fund (its “private loan” portfolio). But it also has a legacy portfolio of investments in smaller, “lower middle market” (LMM) companies with annual EBITDA of $3 million-$20 million and annual revenue of $10 million-$150 million.
It’s still a broad portfolio of 144 companies, spread across more than two dozen industries, and the largest of those (electrical equipment) only accounts for 10% at cost.
Small Fund, Big Diversification
Source: MSC Income Fund Q2 Investor Presentation
More than 90% of the private loan portfolio is secured debt, virtually all of which is first-lien senior secured, and 95% of that bears interest at floating rates. The LMM portfolio is heavily fixed-rate in nature. But that portfolio makes up just more than a third of the investment portfolio at fair value, and it’s shrinking.
In fact, MSC Income Fund actually has shareholder-friendly fee incentives tied to this: When LMMs fall below 20% of the portfolio, the base fee will drop to 1.25%; below 7%, and the fee will drop again, to 1.0%.
MSIF has only been publicly traded since early 2025, and it hasn’t exactly set the world on fire. Its roughly negative 10% total return is in line with the BDC industry, and portfolio credit quality is shaky; nonaccruals account for almost 6% of the portfolio at cost.
That said, MSIF is largely expected to eventually benefit from its ties to Main Street, which has long been among the most productive business development companies. It has been growing NAV while others have been on the decline. Meanwhile, shares trade at a 22% discount to that NAV, and management is taking advantage of that by opening up a $20 million repurchase plan. And it switched to a monthly dividend this year—its 11-cent regular comes out to 10.5%, and its 3-cent quarterly supplementals, if annualized, add roughly another percentage point.
PennantPark Floating Rate Capital (PFLT)
Dividend yield: 13.7%
There’s no secret as to what PennantPark Floating Rate Capital (PFLT) is all about.
This BDC provides financing primarily via floating-rate senior secured loans, though it also deals in equity and joint venture investments. Target companies generate about $10 million-$50 million in annual EBITDA.
While PFLT has a plenty-robust portfolio count of almost 160 direct-investment companies, it’s not as diversified as the previous two companies. That’s because it’s a “value-added” BDC whose management lends its expertise in specific industries, hence a portfolio focus on just five industries: government services, business services, healthcare, technology and consumer.
But PennantPark at Least Keeps Single-Company Exposure to a Minimum
Source: PennantPark Floating Rate Capital June 30 Investor Presentation
PennantPark shareholders were also bitten by a dividend cut—a 22% reduction in the monthly payout earlier this year to 8 cents per share, and PFLT has tacked on tiny 0.33-cent supplementals to each of them so far. But I wrote a couple months ago:
But not all dividend cuts are created equally. In the case of PFLT, its dividend cut is more a reflection of lower base rates than any underlying portfolio issues. In fact, the company’s credit quality is high relative to the sector, and sponsor investment activity is improving.
That remains the case today. Nonaccruals are a lean 1% at cost. While the company had to mark down the value of shoe company Kinetic Systems, that position accounts for less than 1% of the portfolio. Low base fees help. So does a 28% discount to NAV. And again, given PFLT’s floating-rate stance, modest rate hikes could help support the dividend and potentially even drive better supplementals.
Bain Capital Specialty Finance (BCSF)
Dividend yield: 14.4%
Most U.S.-listed BDCs tend to do business here at home. But Bain Capital Specialty Finance (BCSF) is the industry’s “Mr. Worldwide,” providing financing solutions to 214 companies across not just North America, but also Europe and Australia.
And It’s Well-Positioned in Numerous Growth Industries
Source: Bain Capital Specialty Finance Q2 Earnings Presentation
About two-thirds of Bain Capital’s deal mix is direct first-lien loans, though another 16% is tied up in investment vehicles that are almost entirely first-lien, too. Another 16% is split between equity and preferred equity, and the remaining 5% is scattered across second lien and subordinated debt. Almost 95% of BCSF’s debt investments have floating-rate terms.
This business development company has largely underwhelmed since going public in 2018. That’s despite a connection to the Bain Capital platform that offers BCSF resources that other BDCs simply don’t have. This leg up in deal sourcing, as well as its joint ventures, is how BCSF can squeeze a higher portfolio yield out of the middle market than its competitors.
But Bain Capital Specialty Finance’s special dividends have dried up this year. Rising interest rates could be a double-edged sword, helping portfolio yield but also raising the cost of its own debt refinancing. Nonaccruals recently jumped sharply, to 3.2% at cost from 1.4% the quarter prior. Earnings expectations are fading to levels well below what BCSF needs to cover the regular payout.
So while a 29% discount to NAV looks like deep-value territory, the market might be telling us something: That 14%-plus yield has a shelf life.
Monthly Dividends of 11%+ We Can Actually Count On!
What good is a double-digit yield if we’re constantly worrying about when the C-suite is coming to take our dividends away?
That’s why as income hunters, we can’t jump at barely covered dividends to get our yield fix. We need to put in the work to find dependable dividends that can pay all the bills.
Actually, you don’t need to do any work. Because I’ve done it for you.
My “Monthly Dividend Superstars” are a trio of incredible income plays that most people don’t even know about. And they’re built on the premise that “boring is beautiful.”
No reaching for the Pepto every time the economy hiccups.
No recoiling every time Fed Chair Kevin Warsh sneezes.
No, we just collect a high and secure level of income that lets us live our lives instead of doomscrolling our days away.
How high? Consider this: A mere $600,000 nest egg—less than half of what most financial gurus insist you need to retire—put to work in these Monthly Dividend Superstars could generate a $66,000 annual income stream.
That’s $5,500 every month in regular income checks!
Even better? While the current bull run has many stocks priced for perfection, many of these monthly dividend stocks still remain in our “buy zone” … but they might not be for much longer. So click here to learn everything you need about these generous monthly dividend payers right now!