Updated on October 4th, 2026 by Nikolaos Sismanis
Business Development Companies (BDCs) make debt and/or equity investments in smaller businesses.
The appeal of BDCs is:
- Exposure to smaller businesses otherwise not available on the stock market
- Required to distribute income to investors
- Typically very high yields
With this in mind, we created a full downloadable spreadsheet list of over 50 BDCs.
You can download the Excel spreadsheet (along with relevant financial metrics like dividend yield and payout ratios) by clicking on the link below:
This research report will provide an overview of BDCs, along with our top 5 BDCs right now as ranked by expected total returns from the Sure Analysis Research Database.
Table Of Contents
The table of contents below provides easy navigation of the article:
- Overview of BDCs
- Why Invest In BDCs?
- Tax Considerations Of BDCs
- The Top 5 BDCs Today
- #5: MSC Income Fund (MSIF)
- #4: Horizon Technology Finance Corporation (HRZN)
- #3: PennantPark Investment Corporation (PNNT)
- #2: PennantPark Floating Rate Capital Ltd. (PFLT)
- #1: Saratoga Investment Corp. (SAR)
- Final Thoughts
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.
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.
Rising interest rates can negatively affect BDCs if they cause a spike in borrowing costs.
Lastly, investors should also consider credit risk. 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.
Tax Considerations Of BDCs
BDC dividends are typically not fully (or even mostly) “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.
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: MSC Income Fund (MSIF)
- 5-year expected annual return: 12.8%
MSC Income Fund is a business development company advised by a Main Street Capital subsidiary.
It lends mainly to private-equity-backed companies and co-invests with Main Street in lower-middle-market businesses, combining recurring interest income with selective equity upside.
Second-quarter 2026 total investment income was $35.7 million. NII was $12.0 million, or $0.26 per share, while adjusted NII was $14.9 million, or $0.33 per share.
The portfolio included 81 private-loan companies, and 99.5% of private debt investments at fair value were first-lien loans.
NAV increased 4.0% sequentially to $16.51, while non-accruals equaled 1.9% of investments at fair value.
MSC Income declared regular monthly dividends of $0.11 for October through December, plus a $0.03 supplemental distribution for December.
Adjusted NII exactly covered the $0.33 regular quarterly total, but did not cover the supplemental payment by itself.
The company also began repurchasing shares under separate $20 million fund and Main Street purchase programs.
In September, MSIF issued the first $75 million of $150 million in 6.83% unsecured notes due 2029 to refinance 4.04% notes due in October 2026.
The first-lien concentration, NAV increase, and repurchases are constructive, but tighter dividend coverage and the higher refinancing coupon merit attention.
Deep Dive: Click here to download (for free) our most recent 3-Page Sure Analysis PDF report on MSC Income Fund (MSIF).
BDC #4: Horizon Technology Finance Corporation (HRZN)
- 5-year expected annual return: 13.5%
Horizon Technology Finance Corporation provides venture debt to technology, life-sciences, healthcare, and sustainability businesses.
Its senior secured loans generate high current yields, while warrants and equity positions can add upside.
Second-quarter 2026 total investment income increased to $25.0 million, but NII declined to $7.4 million, or $0.11 per share.
The result included $0.07 per share of merger expenses, so adjusted recurring earnings approximately covered the $0.18 regular quarterly distribution.
The larger concern was $38.5 million of unrealized depreciation, substantially related to one portfolio company, which reduced NAV to $6.23 per share from $6.98.
The merger expanded Horizon’s balance sheet, while $135 million of cash, $329 million of credit capacity, and a $228 million backlog support deployment.
Horizon declared $0.06 regular monthly dividends for October through December, plus $0.03 monthly specials funded from spillover income.
The base payout appears more sustainable than the combined amount, especially because spillover income declined to $0.33 per share.
In September, Horizon and its RoHo joint venture announced loan facilities of up to $30 million for NeoVolta and $15 million for Bioness Medical, adding to the deployment pipeline.
Management also increased its repurchase authorization to $20 million after buying 1.37 million shares during the quarter, potentially helping NAV while the stock trades at a discount.
BDC #3: PennantPark Investment Corporation (PNNT)
- 5-year expected annual return: 14.7%
PennantPark Investment Corporation provides private credit and equity capital to U.S. middle-market businesses.
Its portfolio includes first- and second-lien loans, subordinated debt, and a comparatively large equity allocation, which can enhance gains but also makes NAV more volatile.
For the fiscal third quarter ended June 30th, 2026, investment income declined to $24.8 million from $29.6 million as the portfolio and its weighted average yield contracted.
NII fell to $8.9 million, or $0.14 per share, from $0.18 per share one year earlier.
The $1.19 billion portfolio covered 159 companies, yielded 11.0% on interest-bearing debt, and had four non-accruals representing 0.8% of fair value.
NAV declined 2.5% sequentially to $6.56 per share, as $12.0 million of realized gains were more than offset by $16.2 million of unrealized depreciation.
PNNT maintained its $0.08 monthly distribution, but only $0.04 is the base dividend; the remaining $0.04 is supplemental.
Quarterly NII of $0.14 covered about 58% of the $0.24 distributed, so the supplement remains especially vulnerable if recurring income does not recover.
After quarter-end, the PSLF joint venture refinanced part of its securitization, lowering its weighted average financing cost and improving future earnings flexibility.
BDC #2: PennantPark Floating Rate Capital Ltd. (PFLT)
- 5-year expected annual return: 16.0%
PennantPark Floating Rate Capital Ltd. lends primarily to U.S. middle-market companies through floating-rate, senior secured debt.
This limits direct duration risk and places PFLT high in borrowers’ capital structures, although falling rates can compress portfolio income.
For the fiscal third quarter ended June 30th, 2026, investment income increased to $66.1 million and NII reached $25.9 million, or $0.26 per share.
The investment portfolio was $2.50 billion, NAV was $10.26 per share, and the weighted average yield on debt investments was 9.8%.
NAV declined 2.0% sequentially because $37.3 million of realized gains did not fully offset $56.6 million of unrealized depreciation.
PFLT invested $212.1 million, while quarterly sales and repayments totaled $271.7 million, contributing to a smaller balance sheet.
The company recently reduced its monthly distribution from $0.1025 to $0.0833, comprising a $0.08 base dividend and a $0.0033 supplemental payment.
Quarterly NII narrowly covered three payments at the new combined rate, a much healthier relationship than before the reset, but the limited cushion leaves credit costs and rate movements important.
Two senior-loan joint ventures provide additional scale, while 7.375% notes due 2031 extend funding duration at a relatively high fixed cost.
In August, the PSSL joint venture reset a $316.7 million securitization, reducing its weighted average funding spread from SOFR plus 2.31% to SOFR plus 1.82% and extending maturity to 2038.
BDC #1: Saratoga Investment Corp. (SAR)
- 5-year expected annual return: 17.9%
Saratoga Investment Corp. provides debt and equity capital to U.S. middle-market companies, primarily through first-lien loans.
Its SBIC licenses, collateralized loan obligation, joint venture, and portfolio of higher-rated CLO debt broaden its funding and income sources.
For the first fiscal quarter of 2027, assets under management increased 1.6% sequentially to $1.126 billion as net originations totaled $30.8 million.
Total investment income was $30.8 million, while adjusted NII declined to $7.6 million, or $0.47 per share, from $0.66 one year earlier.
NAV fell 4.9% sequentially to $23.23 per share after $15.2 million of net portfolio depreciation.
Credit quality provided one encouraging signal, as non-accruals fell to zero at fair value, although several investments remained on the red watchlist.
Saratoga pays a $0.25 monthly dividend, or $0.75 each quarter.
However, the latest adjusted NII covered only about 63% of that amount, and under-earning the distribution reduced NAV by $0.28 per share during the quarter.
In September, Saratoga issued another $20.1 million of 8.0% unsecured notes due 2031, primarily to repay SPV credit-facility debt.
CFO Henri Steenkamp is scheduled to step down on October 31st while remaining a director and consultant; Christine Ramdihal will become principal financial officer.
The first-lien concentration and zero non-accrual balance at fair value are helpful, but improved recurring earnings are needed for the payout to become more dependable.
Final Thoughts
BDCs can turn private-credit spreads into substantial current income, but this ranking also shows why projected return and dividend quality must be considered together.
All five selections currently have an F Dividend Risk Score, and each has a distinct pressure point despite its double-digit expected return.
SAR leads the ranking, but its distribution materially exceeds recurring NII and its new unsecured debt carries an 8.0% coupon. PFLT’s reduced payout is now close to recurring earnings, while the PSSL securitization reset should lower joint-venture financing costs.
PNNT still relies heavily on a supplemental dividend, and HRZN is absorbing merger and credit-related NAV volatility. MSIF’s first-lien concentration and NAV improvement are constructive, but its regular dividend used all adjusted NII in the most recent quarter and its refinancing carries a higher coupon.
The most useful checkpoints are recurring NII coverage of the base dividend, NAV direction, non-accruals, leverage, portfolio concentration, and the share of each payout funded by temporary supplements or spillover income.
Accordingly, the ranking is best treated as a focused research shortlist. Do not treat it as a list of automatic purchases.
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 and other income securities.
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