Updated on March 14th, 2025 by Bob Ciura
Business Development Companies, otherwise known as BDCs, are highly popular among income investors. BDCs widely have high dividend yields of 5% or higher.
This makes BDCs very appealing for income investors such as retirees. With this in mind, we’ve created a list of BDCs.
You can download your free copy of our BDC list, along with relevant financial metrics such as P/E ratios and dividend payout ratios, by clicking on the link below:
Of course, before investing in BDCs, investors should understand the unique characteristics of the sector.
This article will provide an overview of BDCs. It will also list our top 5 BDCs right now as ranked by expected total returns in the Sure Analysis Research Database.
Table Of Contents
The table of contents below provides for easy navigation of the article:
Overview of BDCs
Business Development Companies are closed-end investment firms. Their business model involves making debt and/or equity investments in other companies, typically small or mid-size businesses.
These target companies may not have access to traditional means of raising capital, which makes them suitable partners for a BDC. BDCs invest in a variety of companies, including turnarounds, developing, or distressed companies.
BDCs are registered under the Investment Company Act of 1940. As they are publicly-traded, BDCs must also be registered with the Securities and Exchange Commission.
To qualify as a BDC, the firm must invest at least 70% of its assets in private or publicly-held companies with market capitalizations of $250 million or below.
BDCs make money by investing with the goal of generating income, as well as capital gains on their investments if and when they are sold.
In this way, BDCs operate similar business models as a private equity firm or venture capital firm.
The major difference is that private equity and venture capital investment is typically restricted to accredited investors, while anyone can invest in publicly-traded BDCs.
Why Invest In BDCs?
The obvious appeal for BDCs is their high dividend yields. It is not uncommon to find BDCs with dividend yields above 5%. In some cases, certain BDCs provide 10%+ yields.
Of course, investors should conduct a thorough amount of due diligence, to make sure the underlying fundamentals support the dividend.
As always, investors should avoid dividend cuts whenever possible. Any stock that has an abnormally high yield is a potential danger.
Indeed, there are multiple risk factors that investors should know before they invest in BDCs. First and foremost, BDCs are often heavily indebted.
This is commonplace across BDCs, as their business model involves borrowing to make investments in other companies. The end result is that BDCs are often significantly leveraged companies.
When the economy is strong and markets are rising, leverage can help amplify positive returns.
However, the flip side is that leverage can accelerate losses as well, which can happen in bear markets or recessions.
Another risk to be aware of is interest rates. Since the BDC business model heavily utilizes debt, investors should understand the interest rate environment before investing.
For example, rising interest rates can negatively affect BDCs if it causes a spike in borrowing costs.
Lastly, credit risk is an additional consideration for investors. As previously mentioned, BDCs make investments in small to mid-size businesses.
Therefore, the quality of the BDC’s portfolio must be assessed, to make sure the BDC will not experience a high level of defaults within its investment portfolio.
This would cause adverse results for the BDC itself, which could negatively impact its ability to maintain distributions to shareholders.
Another unique characteristic of BDCs that investors should know before buying is taxation. BDC dividends are typically not “qualified dividends” for tax purposes, which is generally a more favorable tax rate.
Instead, BDC distributions are taxable at the investor’s ordinary income rates, while the BDC’s capital gains and qualified dividend income is taxed at capital gains rates.
After taking all of this into account, investors might decide that BDCs are a good fit for their portfolios. If that is the case, income investors might consider one of the following BDCs.
Tax Considerations Of BDCs
As always, investors should understand the tax implications of various securities before purchasing. Business Development Companies must pay out 90%+ of their income as distributions.
In this way, BDCs are very similar to Real Estate Investment Trusts.
Another factor to keep in mind is that approximately 70% to 80% of BDC dividend income is typically derived from ordinary income.
As a result, BDCs are widely considered to be good candidates for a tax-advantaged retirement account such as an IRA or 401k.
BDCs pay their distributions as a mix of ordinary income and non-qualified dividends, qualified dividends, return of capital, and capital gains.
Returns of capital reduce your tax basis. Qualified dividends and long-term capital gains are taxed at lower rates, while ordinary income and non-qualified dividends are taxed at your personal income tax bracket rate.
The Top 5 BDCs Today
With all this in mind, here are our top 5 BDCs today, ranked according to their expected annual returns over the next five years.
BDC #5: Barings BDC Inc. (BBDC)
5-year expected annual return: 10.1%
Barings BDC is a business development company (BDC) focused on providing senior secured loans to middle-market companies, primarily in the U.S. and internationally.
Managed by Barings LLC, a global asset manager, the company invests in businesses with earnings before interest, taxes, depreciation, and amortization (EBITDA) ranging from $10 million to $75 million.
Source: Investor Presentation
On February 20th, 2025, Barings BDC posted its Q4 and full–year results for the period ending December 31st, 2024. Net investment income (NII) was $29.5 million, or $0.28 per share, down from $30.2 million or $0.29 per share last quarter.
This decline was driven by a lower weighted average yield on performing debt investments, which fell 110 basis points to 9.5%, due to interest rates normalizing. For the year, NII/share was $1.04.
During the quarter, the company invested $137.9 million in 15 new companies and $156.5 million in existing positions. For FY2025, we expect NII/share of $1.10.
Click here to download our most recent Sure Analysis report on BBDC (preview of page 1 of 3 shown below):
BDC #4: Blue Owl Capital (OBDC)
5-year expected annual return: 10.3%
Blue Owl Capital Corporation is a business development company (“BDC”) that formed in October 2015.
It invests and lends funds to U.S. middle-market companies that generate annual EBITDA between $10 million and $250 million and/or annual revenues of $50 million to $2.5 billion.
The company generates around $1.2 billion in gross investment income annually and is based in New York, New York.
Source: Investor Presentation
Blue Owl Capital reported its Q4 and full-year results for the period ending December 31st, 2024. For the quarter, the company achieved a gross investment income of $394.4 million, 4.0% below compared to last year.
Net investment income (NII) was $184.4 million, down 7.3% compared to last year. NII/share fell four cents to $0.47.
For the year, NII/share was $1.90, relatively flat year-over-year.
The company committed $7.3 billion in new investments across 98 new and 68 existing portfolio companies during the year. At the end of the year, the company’s portfolio had a fair value of $13.2 billion, comprising investments in 227 companies across 30 different industries.
Click here to download our most recent Sure Analysis report on OBDC (preview of page 1 of 3 shown below):
BDC #3: Capital Southwest Corp. (CSWC)
5-year expected annual return: 11.1%
Capital Southwest Corporation is an internally-managed investment company. The company specializes in providing customized debt and equity financing to lower middle market (LMM) companies and debt capital to upper-middle market (UMM) companies located primarily in the United States.
Capital Southwest generates around $82 million in annual revenues and is based in Dallas, Texas.
On February 3rd, 2025, Capital Southwest declared a base quarterly dividend of $0.58 per share, and a supplemental dividend of $0.06 per share. The base annualized dividend remains at $2.32 per share.
Capital Southwest reported its fiscal Q3-2025 results. Total investment income was $52.0 million, up from $48.7 million in the prior quarter.
The growth in investment income was primarily attributable to an increase in prepayment and other fees received during Q3.
Still, the weighted average yield on debt declined sequentially, falling from 12.9% to 12.1%.
Click here to download our most recent Sure Analysis report on CSWC (preview of page 1 of 3 shown below):
BDC #2: Horizon Technology Finance (HRZN)
5-year expected annual return: 13.6%
Horizon Technology Finance Corp. is a BDC that provides venture capital to small and medium–sized companies in the technology, life sciences, and healthcare–IT sectors.
The company has generated attractive risk–adjusted returns through directly originated senior secured loans and additional capital appreciation through warrants.
Source: Investor Presentation
On March 4th, 2025, Horizon released its Q4 and full-year results for the period ending December 31st, 2024. For the quarter, total investment income fell 16.7% year-over-year to $23.5 million, primarily due to lower interest income on investments from the debt investment portfolio.
More specifically, the company’s dollar-weighted annualized yield on average debt investments in Q4 of 2024 and Q4 of 2023 was 14.9% and 16.8%, respectively.
Net investment income per share (IIS) fell to $0.27, down from $0.45 compared to Q4-2023. Net asset value (NAV) per share landed at $8.43, down from $9.06 sequentially.
Click here to download our most recent Sure Analysis report on HRZN (preview of page 1 of 3 shown below):
BDC #1: NewtekOne Inc. (NEWT)
5-year expected annual return: 15.1%
Newtek One provides financial and business services to the small- and medium-sized business market in the United States.
What makes NewTek a unique company is that a good portion of its income is derived from subsidiaries that provide a wide array of business services to its large client base.
The company also gets a significant amount of its income from being an issuer of SBA (Small Business Administration loans), which only very few BDCs are licensed to do.
On February 26th, 2025, Newtek released its Q4 and full-year results for the period ending December 31st, 2024. For the quarter, Newtek reported net income of $18.3 million, or diluted earnings per share (EPS) of $0.69, representing a 62.8% increase over the prior year. Net interest income increased to $11.3 million, up 36.1% from Q4 2023.
Its total assets reached $2.1 billion, marking a 50% rise year-over-year, with loans held for investment growing 23% to $991.4 million.
Newtek’s net interest margin was 2.80%, a slight increase from the prior year.
Additionally, the company’s Alternative Loan Program loan closings skyrocketed by 199% to $91.4 million. Newtek also achieved significant improvements in return on tangible common equity (ROTCE) and return on average assets (ROAA), reaching 31.8% and 4.1%.
Click here to download our most recent Sure Analysis report on NEWT (preview of page 1 of 3 shown below):
Final Thoughts
Business Development Companies give retail investors the opportunity to invest indirectly in small and mid-size businesses.
Previously, investment in early-stage or developing companies was restricted to accredited investors, through venture capital.
And, BDCs have obvious appeal for income investors. BDCs widely have high dividend yields above 5%, and many BDCs pay dividends every month instead of the more typical quarterly payment schedule.
Of course, investors should consider all of the unique characteristics, including but not limited to the tax implications of BDCs.
Investors should also be aware of the risk factors associated with investing in BDCs, such as the use of leverage, interest rate risk, and default risk.
If investors understand the various implications and make the decision to invest in BDCs, the 5 individual stocks on this list could provide attractive total returns and dividends over the next several years.
At Sure Dividend, we often advocate for investing in companies with a high probability of increasing their dividends each and every year.
If that strategy appeals to you, it may be useful to browse through the following databases of dividend growth stocks:
The Dividend Aristocrats List: S&P 500 stocks with 25+ years of dividend increases.
The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 54 stocks with 50+ years of consecutive dividend increases.
The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in the S&P 500.
Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].
