Business development companies (BDCs) are a high-yield investment sector benefiting from higher interest rates.
One of the largest BDCs recently changed its name, giving me a good excuse to review this under-the-radar, high-yield stock – one of my favorites…
On July 6, BDC Owl Rock Capital Corporation, stock symbol ORCC, changed its name to Blue Owl Capital Corporation (OBDC). I know many investors were unfamiliar with ORCC, so they may be wondering where the heck OBDC came from.
The BDC now known as Blue Owl Capital Corporation launched in July 2019, so it was only a few months old when the pandemic triggered a massive selloff of all types of high-yield investments. The company has done well over the last four years, but with little notice from the investing public. However, I think Blue Owl should be on the radar of income-focused investors.
In the BDC universe of about 50 companies, Blue Owl Capital is one of the largest. With a $5.5 billion market cap, it is the second-largest company in the sector. Like all types of finance businesses, larger is better, allowing the company to have a more diversified portfolio and lower expense structure.
Since its IPO, Blue Owl has paid a consistent dividend. The initial $0.31 per share quarterly rate stayed in effect from the 2019 third quarter through the same quarter of 2022. For the fourth quarter of last year, the company increased its regular dividend by 6.5% to $0.33 per share.
With the dividend increase, management announced a new policy to declare a “formula-based quarterly supplemental dividend in an amount to be determined each quarter.” The supplemental payouts have ranged from $0.03 to $0.06 over the last three quarters.
I have shared with my newsletter subscribers that higher interest rates should produce greater profits for BDCs. They provide variable-rate loans to small to medium-sized businesses. By law, a BDC operates at a low level of debt to equity. As a result, rising interest rates drive more net investment income to the bottom line, allowing a well-run BDC to pass along the higher profits as dividends to investors.
OBDC currently yields over 9%, not including any supplemental dividends. I expect Blue Owl to announce a $0.05 to $0.07 extra dividend next week.
— Tim Plaehn
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Source: Investors Alley