Passive Income Investments | Business Development Companies (BDCs) 

Business Development Companies – or BDCs for short – are publicly traded companies that provide debt and equity financing for small to medium sized businesses that are not able to access funding through traditional bond markets.  

BDC stocks often pay higher than average dividends and enjoy certain tax advantages, making them ideal passive income generators when considered as part of a well-diversified portfolio. So, let’s take a closer look… 

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What is a Business Development Company? 

As I already mentioned above, BDCs are publicly listed organizations that make equity or loan investments in private, small, and medium-sized enterprises.  

These are Investment Company Act-regulated investment businesses that must distribute at least 90% of their taxable revenue to stockholders in the form of dividends. 

A corporation must satisfy the following requirements to qualify as a BDC: 

1. It must be SEC-registered and have chosen to be regulated as a BDC. 

2. At least 70% of its assets must be invested in private or thinly traded public enterprises. 

3. It must have at least $50 million in assets. 

4. It is required to pay at least 90% of its taxable revenue to shareholders in the form of dividends. 

There are plenty of BDC stocks to choose from, and as traditional banking and lending criteria continue to tighten, more small-to-medium sized businesses are turning to alternative lenders. 

As such, BDC assets have grown from nearly $5 billion in 2002 to over $200 billion in 2021, and there are around 50 BDC stocks to choose from. 

Benefits of BDC Stocks? 

BDC stocks deliver a passive income, higher-than-average yields, more regular dividend distributions, the possibility for capital appreciation, and some tax benefits.  

They also provide investors with difficult-to-obtain exposure to non-publicly listed private enterprises. These smaller companies have different risk and return characteristics than larger publicly traded companies, so investors might enjoy some diversification benefits too. 

There are also some tax benefits associated with owning BDC stocks… 

Like some of the other passive income stocks listed in this article (REITs and MLPs for example), BDCs are classed as ‘pass-through entities’. This means that they do not pay federal income taxes at the corporate level.  

Instead, they pass their income on to shareholders in the form of pre-tax dividends. It is the individual shareholders who are responsible for paying taxes on the income they receive. This can result in tax savings for some investors. 

Here’s an itemized list of some of the main benefits of investing in BDC stocks: 

 1. Passive income: BDC stocks often pay higher dividend yields compared to typical S&P500 stocks, providing investors with a reliable source of passive income. 

2. More frequent dividend distributions: BDCs often pay out dividends more frequently than traditional stocks, often on a quarterly or monthly basis. This is helpful for investors looking for monthly income investments to help cover regular living expenses. 

3. Exposure to private companies: BDCs offer exposure to private companies that are not publicly traded, providing diversification benefits to investors’ portfolios. 

4. Potential for capital appreciation: BDCs can offer the potential for capital appreciation as the private companies in which they invest grow and become more valuable. 

5. Tax benefits: BDCs are pass-through entities, which means that they do not pay federal income taxes at the corporate level. Instead, they pass through their income to shareholders, who are responsible for paying taxes on their share of the income. This can result in tax savings for some investors. 

6. Professional management: BDCs are managed by experienced investment professionals who have expertise in analyzing and investing in private companies. 

7. Low correlation with the broader stock market: BDCs often have a low correlation with the broader stock market, providing diversification benefits to investors’ portfolios. 

8. Potential for high returns: BDCs can offer high returns to investors, especially when compared to other income-generating investments like bonds and CDs. 

9. Access to investment opportunities: BDC stocks provide individual investors with access to investment opportunities by proxy that would otherwise only be available to large institutional investors. 

10. Transparency: BDCs are required to file regular reports with the SEC, providing investors with transparency into the companies in which they are investing. 

Disadvantages and Risks of Investing in Business Development Company BDC Stocks 

Of course, like with any investment, there are risks associated with owning stock in Business Development Companies. 

As noted above, BDCs provide shareholders with indirect exposure to private (non-publicly traded), small, and medium-sized businesses. While the diversification benefits can be great, these smaller enterprises also tend to be riskier than larger publicly traded companies. 

Small private companies may have minimal financial history, limited financial liquidity, and no track record of success. 

Moreover, due to the nature of their underlying investments in debt, the BDCs are sensitive to interest rate risk, credit risk, and other market conditions that may impact the ability of their portfolio companies to repay r profitability. 

Investors should also examine the expenses involved with investing in BDCs in addition to doing research and due diligence.  

Management fees, performance fees, and other expenditures may be charged by BDCs, reducing the investor’s return on investment. It is critical to comprehend these costs and how they might affect your total investment results. 

Another consideration when investing in BDCs is the possibility of liquidity concerns. BDCs make investments in private firms that might be difficult to sell if market conditions shift. This may have an impact on the BDC’s capacity to satisfy shareholder redemption demands, resulting in delays or reduced payments. 

Finally, BDC stocks, like other companies, are susceptible to typical market fluctuations and volatility. 

Here’s an itemized list of some of the risks that are specific to investing in BDC stocks, and the wider stock market in general: 

1. Risky investments: BDCs invest in private, small and medium-sized businesses, which can be riskier than investing in publicly traded companies.  

2. Interest rate risk: Rising interest rates can negatively impact the value of the BDC’s portfolio, while falling interest rates can reduce the yield on their investments. 

3. Credit risk: The companies in which BDCs invest could default on their debt obligations to the BDC. This can impact the value of the BDC’s portfolio, and its ability to pay dividends. 

4. Market risk: there is always the risk that the overall stock market will decline. This could impact the value of the BDC’s portfolio, the value of the BDC stock itself, and its ability to pay dividends to shareholders. 

5. Liquidity risk: BDCs portfolio companies could be difficult to sell if market conditions change. This could impact the BDC’s ability to meet redemption requests from shareholders, which can result in delays or lower payouts. 

 6. Management risk: If the BDC’s management team makes poor investment decisions, it could impact the value of the BDC’s portfolio and its ability to pay dividends. 

7. Fees: BDCs charge management fees, performance fees, and other expenses. These could impact the company’s profitability and shareholder returns. 

 8. Regulatory risk: BDCs are regulated by the SEC, as well as other government agencies. Regulatory changes could impact a BDC’s operations and performance. 

 9. Volatility: Like all publicly traded stocks, BDC stocks are subject to fluctuations in the stock market and economy in general. As such, BDC stocks could be volatile investments at times. 

 10. Currency risk: If a BDC holds investments in foreign companies or currencies, fluctuations in foreign currency exchange rates could impact the value and performance of the BDC’s portfolio and its ability to pay dividends.

All Currently Listed BDC Stocks 

Here is a list of all 50 BDC stocks currently listed on the stock exchange, including a brief description of each company: 

Ares Capital Corporation (ARCC) – Provides financing solutions to middle-market companies and asset-based borrowers. 

Golub Capital BDC, Inc. (GBDC) – Provides financing solutions to middle-market companies. 

New Mountain Finance Corporation (NMFC) – Provides financing solutions to middle-market companies. 

Main Street Capital Corporation (MAIN) – Provides debt and equity financing to lower middle-market companies. 

Hercules Capital, Inc. (HTGC) – Provides financing solutions to technology, life sciences, and sustainable and renewable technology companies. 

PennantPark Investment Corporation (PNNT) – Provides financing solutions to middle-market companies. 

TPG Specialty Lending, Inc. (TSLX) – Provides financing solutions to middle-market companies. 

Prospect Capital Corporation (PSEC) – Provides financing solutions to middle-market companies. 

Gladstone Investment Corporation (GAIN) – Provides financing solutions to lower middle-market companies. 

TCP Capital Corp. (TCPC) – Provides financing solutions to middle-market companies. 

Capital Southwest Corporation (CSWC) – Provides financing solutions to middle-market companies. 

Horizon Technology Finance Corporation (HRZN) – Provides financing solutions to technology and life science companies. 

Medley Capital Corporation (MCC) – Provides financing solutions to middle-market companies. 

Triangle Capital Corporation (OTC: TCCA) – Provides financing solutions to lower middle-market companies. 

BlackRock Capital Investment Corporation (BKCC) – Provides financing solutions to middle-market companies. 

Fidus Investment Corporation (FDUS) – Provides financing solutions to lower middle-market companies. 

OFS Capital Corporation (OFS) – Provides financing solutions to middle-market companies. 

OFS Capital Corporation (OFS) – Provides financing solutions to middle-market companies. 

Solar Senior Capital Ltd. (SUNS) – Provides financing solutions to middle-market companies. 

THL Credit, Inc. (TCRD) – Provides financing solutions to middle-market companies. 

TriplePoint Venture Growth BDC Corp. (TPVG) – Provides financing solutions to venture-growth stage companies. 

TCG BDC, Inc. (CGBD) – Provides financing solutions to middle-market companies. 

WhiteHorse Finance, Inc. (WHF) – Provides financing solutions to middle-market companies. 

Barings BDC, Inc. (BBDC) – Provides financing solutions to middle-market companies. 

KCAP Financial, Inc. (KCAP) – Provides financing solutions to middle-market companies. 

PennantPark Floating Rate Capital Ltd. (PFLT) – Provides financing solutions to middle-market companies. 

Saratoga Investment Corp. (SAR) – Provides financing solutions to lower middle-market companies. 

Stellus Capital Investment Corporation (SCM) – Provides financing solutions to middle-market companies. 

Monroe Capital Corporation (MRCC) – Provides financing solutions to middle-market companies. 

Garrison Capital Inc. (GARS) – Provides financing solutions to lower middle-market companies. 

Gladstone Capital Corporation (GLAD) – Provides financing solutions to lower middle-market companies. 

KCAP Financial, Inc. 7.125% Notes due 2019 (KAP) – Provides financing solutions to middle-market companies. 

Newtek Business Services Corp. (NEWT) – Provides business solutions and financing to small and medium-sized businesses. 

TriplePoint Venture Growth BDC Corp. 5.75% Notes due 2022 (TPVY) – Provides financing solutions to venture-growth stage companies. 

BlackRock TCP Capital Corp. 6.30% Notes due 2022 (TCPCZ) – Provides financing solutions to middle-market companies. 

PennantPark Investment Corporation 5.50% Notes due 2024 (PNNTG) – Provides financing solutions to middle-market companies. 

Oxford Square Capital Corp. (OXSQ) – Provides financing solutions to middle-market companies. 

Gladstone Capital Corporation 6.00% Notes due 2024 (GLADN) – Provides financing solutions to lower middle-market companies. 

Apollo Investment Corporation (AINV) – Provides financing solutions to middle-market companies. 

Bain Capital Specialty Finance, Inc. (BCSF) – Provides financing solutions to middle-market companies. 

BlackRock Capital Investment Corporation 6.875% Notes due 2043 (BKCCM) – Provides financing solutions to middle-market companies. 

Gladstone Investment Corporation 6.25% Notes due 2023 (GAINM) – Provides financing solutions to lower middle-market companies. 

New Mountain Finance Corporation 5.75% Notes due 2023 (NMFX) – Provides financing solutions to middle-market companies. 

Oxford Lane Capital Corp. (OXLC) – Provides financing solutions to collateralized loan obligation (CLO) vehicles. 

TCG BDC, Inc. 4.50% Notes due 2022 (CGBDN) – Provides financing solutions to middle-market companies. 

Ares Capital Corporation 5.875% Notes due 2029 (ARCCM) – Provides financing solutions to middle-market companies. 

Horizon Technology Finance Corporation 6.25% Notes due 2022 (HTFA) – Provides financing solutions to technology and life science companies. 

Gladstone Investment Corporation 6.375% Series E Cumulative Term Preferred Stock (GAINL) – Provides financing solutions to lower middle-market companies. 

THL Credit, Inc. 6.75% Notes due 2022 (TCRX) – Provides financing solutions to middle-market companies. 

WhiteHorse Finance, Inc. 6.50% Notes due 2025 (WHFBZ) – Provides financing solutions to middle-market companies. 

Conclusion 

To summarize, like other investing strategies such as private money lending and mortgage note investing, investing in BDCs may be an excellent strategy for investors to generate passive income while diversifying their portfolios. 

BDCs provide significant dividend rates as well as exposure to private, non-public enterprises. Nevertheless, investors must be aware of the dangers connected with BDCs, such as the possibility of liquidity concerns and the fees involved with investing. 

Investors may discover the finest BDCs for their investment goals and risk tolerance with adequate research and due diligence. 

 References 

FS Investments – BDC 

Charles Schwab – Understanding BDC Stocks 

Stock Market MBA – List of BDC Stocks 

Grant Thornton – Understanding BDC Tax Related Opportunities and Challenges