I was pleasantly surprised to read a recent Wall Street Journal article highlighting the investment benefits of Business Development Companies (BDCs).

The article included a couple of BDCs that are on my Dividend Hunter recommended portfolio.

Let’s dig in, and take a look at why these BDCs are such great income investments…

The WSJ article was titled “The 11% Yield That Isn’t in Your Mutual Fund.” It took an evenhanded look at BDCs. Here are some excerpts and, when appropriate, my comments.

BDCs typically raise money from public stock investors that they then lend to small, often private, companies. After banks pulled back from lending in the wake of the 2008-09 financial crisis and again in March following the collapse of a handful of midsize lenders, BDCs helped fill the void.

BDCs have operated in good financial times and bad. It’s just when things turn bad that these stocks get more investor interest.

They give individual investors the opportunity to tap into high-yielding private markets that are usually only open to big, sophisticated institutions. The companies pay out at least 90% of the interest they receive in cash dividends, much like real-estate investment trusts, adding to their popularity among small investors.…

The fat yields on BDCs come with a catch: Unlike a standard fixed-pay bond, the payouts aren’t set in stone. What the shareholder actually receives depends on what the BDC earns from its investments. BDCs could end up paying dividends that are smaller—or larger—than projected.

The top-tier BDCs have consistently grown their dividend rates. These are businesses that can be managed for growth.

“As BDCs have become larger, we can now offer financing to much larger and more important companies than before,” said Craig Packer, CEO of Blue Owl Capital Corp. “Today, we lend to companies that any lender would like to finance.”

Blue Owl lends to nearly 200 companies for a total portfolio of nearly $13 billion.

Tim: Blue Owl Capital Corp (OBDC) has been a Dividend Hunter recommended investment since its 2019 IPO. The company has grown to become the second largest in the sector.

Rising interest rates have been a boon to the sector. About 80% of BDC assets are floating rate loans, according to Robert Dodd, senior analyst at Raymond James. That means the companies earn extra income from their loans when rates go up, as long as their borrowers can make their payments.

Many BDCs are earning much higher net interest income. Instead of increasing their regular dividends, the companies have been paying and declaring supplemental dividends. This dividend strategy allows investors to count on stable dividends if and when interest rates decline.

Shares of BDCs aren’t found in many common investment products. Securities and Exchange Commission rules require any mutual fund or index fund that owns BDCs to report management fees earned by the company as a fund expense. That drives up expense ratios reported by funds and, in turn, limits interest from institutions in the sector.

This last fact was new to me. It feeds into the investors’ focus on lower fees instead of investing for better returns.You don’t need an ETF for a mutual fund to get into BDC investing. These are publicly traded stocks, easily purchased through your brokerage account. I currently have four top BDCs on the Dividend Hunter recommended portfolio. To join and get the full list, take a look below.