7 Best BDCs to Buy for Income

BDCs to buy with great yields.

Investors looking for income typically gravitate to familiar sectors like utility stocks or consumer staples to find reliable dividend payers. These assets are seen as low risk because they have a strong baseline of sales, with utilities providing heat and light and staples firms providing must-haves like soap or toothpaste. But while other dividend stocks may not be as familiar, there are a host of picks known as “business development companies” that offer significantly more impressive yields — and in some cases, with a big measure of reliability. BDCs are investment companies that help smaller firms meet their capital needs through loans or sometimes even equity investments. Here are seven impressive BDCs worth a look.

KCAP Financial (ticker: KCAP)

KCAP Financial specializes in investments in debt securities including collateralized debt obligations. The firm’s preferred stomping ground is in privately-held mid-sized companies where it can offer senior secured loans. In plain English, this means KCAP finds companies that are big enough to be stable but small enough they still have growth and still have significant financing needs; KCAP’s typical loan is between $5 million and $20 million. A diversified operation, KCAP’s portfolio of debt and investments spans health care, cargo and transportation, real estate, agriculture and aerospace. This helps smooth out performance, allowing the BDC to go wherever it can to get the best return.

Current yield: 11.1 percent

Ares Capital Corp. (ARCC)

Ares Capital may not have a double-digit yield like KCAP, but it’s one of the largest business development companies on Wall Street by market cap with a $7 billion valuation at present. That scale allows Ares to specialize in “direct origination” for its debt and equity investments, meaning that it doesn’t need consultants or outside firms to help tie up a deal. With a deep bench of lawyers and investment professionals as well as deep pockets, ARES gets the job done solo. The efficiency created by this model helps to boost performance, and in turn the dividends that flow back to shareholders.

Current yield: 9.7 percent

Saratoga Investment Corp. (SAR)

Instead of focusing mostly on debt like some other BDCs, Saratoga is a business development company that specializes in buyouts, acquisition financings, and “transitional financing transactions.” These are all rather polished ways of saying that Saratoga takes a hard look at companies that have seen better days, and then comes in to clean them up and maximize their investment potential. The firm primarily invests $5 million to $20 million in small companies. Existing investments include debt and equity investments in data company Omatic Software, preferred equity investments in ice machine company Easy Ice and debt and equity investments in iPhone case and messenger bag merchant Targus, to name a few.

Current yield: 9.5 percent

TPG Specialty Lending (TSLX)

TPG Specialty Lending is, as the name implies, a company that focuses mainly on secured loans that are prioritized in the debt structure of a company. That means that there is collateral backing up the loan, and that in the event of a default the borrower must make good on the loans to TPG before other parties get a piece of what’s left. That helps reduce the risk profile of the loans a bit, and TSLX also does a good job of diversifying across sectors. Right now, its portfolio includes loans to discount retailer 99 Cent Only Stores, health care software firm ChiroTouch and education services firm Curriculum Associates.

Current yield: 8.1 percent

Apollo Investment Corp. (AINV)

Apollo has a market capitalization north of $1 billion and is associated with the private equity powerhouse Apollo Global Management that specializes in leveraged buyouts. This relationship is very important for AINV, because it allows for a flow of ideas and staff that helps set this BDC apart. Case in point: More than half of Apollo’s portfolio is in “first lien debt” — meaning there is nobody who comes before this investment firm when it comes times for a given company to pay the bills. Forging these kinds of deals ensures a steady and reliable stream of interest payments on its loans and steady dividends for AINV investors.

Current yield: 12.3 percent

Solar Capital Ltd. (SLRC)

Solar Capital is another BDC that casts a wide net across a variety of industries. Investing primarily in the U.S. with an “investment grade” focus, SLRC avoids distressed companies in dire need of capital and instead invests in senior, secured loans to middle market companies with staying power. That includes 230 different companies with an average fair value of $7.4 million per investment. At nearly $900 million in total market capitalization, the company is also big enough that it can cut out middlemen and employ a hands-on underwriting process for each investment that allows it to truly understand the business — and save a bit on fees along the way.

Current yield: 8 percent

PennantPark Floating Rate Capital (PFLT)

While most people are familiar with fixed rate loans like a mortgage or a car payment that keep the same interest rate, “floating rate loans” offer adjustable rates that can change over time. And with the Federal Reserve consistently raising interest rates, the outlook for floating rate loans is for them to adjust higher. That allows PFLT to benefit as its interest payments rise in kind. Thanks to loans that are senior in nature as well as a longer time horizon in its investments than some other firms, PFLT has built a diversified portfolio of almost 90 companies across 22 industries that allow it to avoid volatility and keep dividends generous.

Current yield: 8.9 percent

The best BDCs to buy for income investors.

Here are seven business development companies that are good picks for income investors.

— KCAP Financial (ticker: KCAP)

— Ares Capital Corp. (ARCC)

— Saratoga Investment Corp. (SAR)

— TPG Specialty Lending (TSLX)

— Apollo Investment Corp. (AINV)

— Solar Capital Ltd. (SLRC)

— PennantPark Floating Rate Capital (PFLT)

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