The recent bull market has drawn attention not only for its current strength but also as part of a longer-term trend of a secular bull market that began in 2013. Amidst discussions of market performance, retail investors are primarily concerned with securing solid returns in the present. One avenue to achieve this is through investing in high-yield dividend stocks, which offer a regular income stream irrespective of market fluctuations and the potential for robust returns on investment.
While various stock sectors are known for their high dividends, business development companies (BDCs) stand out for providing credit access to a diverse array of small- and mid-sized businesses and distributing investment profits to their own investors.
Bank of America analyst Derek Hewett expresses optimism regarding the BDC sector, citing stronger core EPS (earnings per share) and stable credit amid an improving investment outlook. He notes that elevated base rates are expected to persist in the near term, supporting a more sustainable top line for BDCs. Despite higher rates, Hewett anticipates solid credit performance due to the resilience of underlying borrower performance.
Hewett further elevates his stance on two specific BDC stocks boasting dividend yields of at least 9%. These stocks not only garner favor from Bank of America but also receive ‘Strong Buy’ ratings from the analyst consensus, as per the TipRanks database. Let’s delve deeper into these promising investment opportunities.
Golub Capital BDC (GBDC)
The first stock under consideration is Golub Capital (NASDAQ: GBDC), a mid-cap business development company (BDC) that specializes in providing capital and credit services to small- and mid-sized enterprises (SMEs). Like its peers in the BDC sector, Golub plays a crucial role in supporting the growth of the US economy by offering essential financial solutions to its target client base within the small business sector.
Golub Capital prioritizes delivering attractive total returns for its investors, a goal it achieves by maintaining a high-quality client base, with a significant portion of repeat clients. As an experienced credit asset manager, Golub emphasizes portfolio quality, which is reflected in its substantial investment portfolio. As of December 31, 2023, the company’s portfolio comprised investments in 357 companies with a fair value of $5.443 billion. The majority of the portfolio, accounting for 86%, consists of first lien one-stop loans, with the remainder diversified across first lien traditional senior loans, equity, and junior loans. Golub’s investments span various sectors, with software firms representing the largest segment at 27%, followed by healthcare providers and specialty retail.
In the last reported quarter, fiscal 1Q24, Golub’s high-quality portfolio generated total investment income of $164.77 million, exceeding forecasts by $3.79 million, albeit remaining flat year-over-year. This income supported a net investment income of 50 cents per share by non-GAAP measures, surpassing estimates by 2 cents per share. Importantly, Golub’s net investment income per share fully covered both regular and special dividends, with the annualized payment of $1.56 per common share yielding a forward yield of 9.5%.
Analyst Derek Hewett of Bank of America believes that Golub Capital presents an attractive investment opportunity that is not fully reflected in its current share price. Hewett highlights Golub’s top-tier lending reputation in the middle market, attractive financing options, and unique scale to underwrite larger deals as factors supporting the stock’s value proposition. Consequently, he upgraded Golub Capital shares from Neutral to Buy, setting a $17 price target. When combined with the dividend, this target implies a total return potential of 13.5% for the year ahead.
Blackstone Secured Lending Fund (BXSL)
The next Bank of America BDC pick is Blackstone Secured Lending Fund (BXSL), a business development company operating under the umbrella of the renowned asset manager, Blackstone. BXSL serves as a key source of capital and credit for private companies in the US financial services sector. Similar to Golub Capital, BXSL maintains a diversified investment portfolio across various industries, with a notable focus on software and healthcare, representing 17% and 11% of its portfolio, respectively.
BXSL primarily invests in first lien senior secured loans, with 98.5% of its investments falling under this category, and the majority, 94.75%, located in the US. The company also has investments in Canada and Europe, totaling active investments in 196 client companies with a combined fair value of $9.9 billion.
In its last fiscal quarter, 4Q23, BXSL reported strong total investment income of $304 million, marking a robust 21% year-over-year increase and surpassing expectations by $11.28 million. The company’s net investment income of 96 cents per share exceeded forecasts by 2 cents per share. BXSL declared a dividend of 77 cents per common share, fully covered by its net investment income, offering investors a forward yield of 10% on an annualized basis.
Analyst Derek Hewett of Bank of America believes that BXSL presents a compelling investment opportunity due to its proprietary origination platform, late-cycle oriented portfolio, and favorable fee structure, which enhances shareholder alignment. Additionally, BXSL has demonstrated best-in-class credit performance since its inception. Consequently, Hewett upgraded BXSL from Neutral to Buy, setting a $32 price target, implying a modest gain of approximately 4% over the one-year horizon. When combined with the dividend, this potential share appreciation translates to a one-year return of 14%.
Overall, sentiment among analysts is bullish on BXSL, with a Strong Buy consensus rating based on 6 recent analyst reviews, with 5 Buy ratings compared to 1 Hold rating.