Sometimes you can get high cash flow as an investor without doing much work, after the initial vetting is done. That’s the main objective of income investing, an approach that involves buying well-researched assets for their yields.
The idea is, for example, that if you put $10,000 into quality stocks that average a 4% yield for a year, you can earn $400 in passive income. Finding stocks that average a 5% yield can increase your annual earnings to $500. While the yield offers immediate cash flow, your passive income can grow each year due to dividend hikes and reinvestments.
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The companies behind high-yield stocks are usually more mature than those that have low yields or don’t pay out dividends at all. Some dividend stocks also tend to provide more stability compared with growth stocks.
If you want high yields, you may want to look at business development companies, or BDCs. These firms give investors the opportunity to generate high cash flow from their capital. But BDCs also come with inherent risks you should be aware of. This guide will explain business development companies, assess their pros and cons, and outline some of the top BDC stocks and ETFs to buy for income.
What Is a Business Development Company?
BDCs are firms that invest in small and midsize businesses. These firms generate revenue by issuing debt or obtaining equity in companies. They are similar to venture capital funds, but you don’t have to be an accredited investor to buy shares of BDCs.
When lending money, BDCs can set higher interest rates because they give loans to riskier businesses. Federal regulations prevent most banks from working with the companies BDCs work with, giving them the opportunity to collect more interest. But that also means more risk for investors.
BDCs rely on the performance of their investments to deliver positive returns. If any of the small or midsize businesses under a BDC fold or fail to make loan payments, the BDC can face some turbulence.
Advantages of BDCs
The main draw for BDCs is their high dividend yields. You can, of course, generate capital gains from BDC shares as well.
Just as with real estate investment trusts, or REITs, BDCs must pay 90% of profits out to shareholders via dividends. That extra cash flow can help you cover more of your living expenses instead of waiting for a non-BDC stock’s dividend to catch up through years of dividend hikes.
BDC Risks to Consider
BDCs have high yields, but that also comes with risk. These firms often get exposure to distressed businesses and hope that they will produce long-term returns. Sticking a BDC under the microscope and reviewing its holdings can help you determine if the high yield is worth it.
A 2023 GenTrust report, “The Fallacy of Income Investing,” highlights some other concerns that are applicable to BDCs. While the report does not specifically address BDCs, it does touch on the dangers of yield chasing. Since BDCs appeal to investors seeking high yields, it’s important to take some of the report’s findings into consideration.
“An overemphasis on maximizing income generally exposes a portfolio to the risk of loss during a period of rising interest rates,” the report states. GenTrust encourages investors to focus on the total return of their assets instead of high yields.
Any rate cuts from the Federal Reserve stand to help BDC investors. However, it’s important to keep in mind that dividend distributions from BDCs are treated as ordinary income. That means you’ll get taxed at a higher rate compared to qualified dividend distributions from publicly traded corporations. Those taxes may disappear if President Donald Trump decides to replace the income tax with tariffs, but for now, you have to factor in taxes when assessing the true yield of a BDC stock.
Some BDCs can generate respectable returns while paying out high dividends. However, those dividends represent money that cannot be reinvested into the business. Even though companies like Amazon.com Inc. (ticker: AMZN) and Adobe Inc. (ADBE) could comfortably offer dividends if they chose to, they avoid such payouts so they can reinvest more money into their businesses.
If you want to get exposure to this asset category, here are some of the top BDC stocks and ETFs to buy:
| Stock/ETF | Yield* |
| Blue Owl Capital Inc. (OWL) | 4.4% |
| Main Street Capital Corp. (MAIN) | 5.6% |
| Ares Capital Corp. (ARCC) | 9.7% |
| FS KKR Capital Corp. (FSK) | 13.5% |
| VanEck BDC Income ETF (BIZD) | 10.0% |
| Invesco Global Listed Private Equity ETF (PSP) | 3.3% |
| Global X Alternative Income ETF (ALTY) | 7.7% |
*Trailing-12-month yield for BDC stocks; 30-day SEC yield for ETFs.
Blue Owl Capital Inc. (OWL)
Blue Owl Capital, previously known as Owl Rock Capital Corp., invests in mid-market U.S. companies. The company prioritizes real estate, credit and strategic capital. It has $251 billion in total assets under management, with more than half of that amount in credit. AUM increased by 52% year over year in Q4 2024.
The firm has a “BBB” Fitch rating and $505.7 million in liquidity. Shares are down 28.5% year to date as of April 21, but OWL pays a dividend yield of 4.4%.
Main Street Capital Corp. (MAIN)
Main Street Capital offers monthly dividend payouts that come to a trailing-12-month yield of 5.6%. Shares have more than doubled over the past five years. The BDC stock has $8.1 billion in capital under management, with 190 companies in its portfolio. Main Street deals in lower-middle-market and private credit, and helps with debt financing, acquisitions and management buyouts.
Main Street Capital prioritizes companies with $10 million to $150 million in annual revenue and earnings before interest, taxes, depreciation and amortization, or EBITDA, ranging from $3 million to $20 million. The average investment size is $21.5 million.
Ares Capital Corp. (ARCC)
Ares Capital prioritizes middle-market companies, and its shares are up 185% over the past five years. The BDC comes with a 9.7% yield.
The firm reported $26.8 billion in its portfolio in the fourth quarter of 2024. Ares Capital has $635 million in cash and cash equivalents. It currently has investments in 550 companies, with more than half of its total assets in the credit segment.
FS KKR Capital Corp. (FSK)
FS KKR Capital has $13.5 billion in total assets spread across 214 companies. More than half are in the following industries: software and services, commercial and professional services, capital goods, and health care equipment and services. About 20% of the portfolio is concentrated in the top 10 investments.
Shares are down 9.3% year to date, but they come with a trailing dividend yield of 13.5%. The firm provides customized credit solutions to private middle-market U.S. companies.
VanEck BDC Income ETF (BIZD)
VanEck BDC Income ETF has delivered a 21% average annual return over the past five years. It gives investors exposure to various business development companies, including high-income BDCs. The fund’s 30-day SEC yield is 10%, but keep in mind that its expense ratio is enormous, at 13.33%. This ETF specializes in private credit and lending to middle-market companies. It has $1.4 billion in total net assets.
The fund’s top three holdings are Ares Capital, Blue Owl and the Blackstone Secured Lending Fund (BXSL). Those three assets make up more than 40% of the fund’s total portfolio.
Invesco Global Listed Private Equity ETF (PSP)
The Invesco Global Listed Private Equity ETF, which tracks the Red Rocks Global Listed Private Equity Index, holds securities that include American depositary receipts and global depositary receipts. These ADRs and GDRs include 40 to 75 private equity companies and BDCs. PSP has a five-year annualized return of 13.5%, and it has a 30-day SEC yield of 3.3%.
PSP’s top 10 holdings make up nearly half of its total assets and include familiar names such as investment firms KKR & Co. Inc. (KKR), Blackstone Inc. (BX) and Blue Owl Capital. The top two holdings, 3i Group PLC (III.L) and Sofia SA (SOF.BR), make up more than 10% of the fund’s total assets.
This ETF’s SEC yield may be lower than those of the other investments on this list, but its net expense ratio is lower, too, at 1.79%.
Global X Alternative Income ETF (ALTY)
The Global X Alternative Income ETF holds various alternative investments that offer high income instead of focusing solely on BDCs. The fund invests in five distinct income segments: master limited partnerships and infrastructure, real estate, preferred stocks, emerging-market bonds, and covered calls.
ALTY’s top three holdings are other funds: Global X Emerging Markets Bond ETF (EMBD), Global X SuperDividend REIT ETF (SRET) and Global X U.S. Preferred ETF (PFFD).
These three investments represent 58.4% of the fund’s assets. ALTY has a relatively low expense ratio of 0.5%, and it’s up by 12% annualized over the past five years. The fund makes monthly payouts and has a 30-day SEC yield of 7.7%.
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7 Best BDC Stocks and ETFs to Buy for Income originally appeared on usnews.com
Update 04/22/25: This story was previously published at an earlier date and has been updated with new information.
