JamesBrey
As my regular readers probably know, I am not bullish on the BDC (BIZD) sector right now. I recently sounded caution on sector blue chips Ares Capital Corp (ARCC) and Main Street Capital (MAIN) while also pointing out the challenges being faced by FS KKR (FSK) as well as the sector as a whole. As a result, I have been selling my previously substantial holdings in the sector fairly aggressively recently, including my position in Blackstone Secured Lending (NYSE:BXSL) after enjoying very strong returns in that position.
With that being said, I understand from the comments sections of these aforementioned articles that many investors like the BDC sector purely for the dividend income that it provides and do not concern themselves too much with the total returns component of the investment. For those investors, I would still caution them that in the event of a material economic downturn, many BDCs will likely have to cut their dividends. However, I would also say that for investors who wish to stick around in the BDC sector with dividend income being their sole focus, you cannot do better than BXSL right now. In this article, I will discuss three reasons why.
#1. BXSL Stock’s Dividend Yield Is Very Attractive
First and foremost, BXSL’s dividend yield is quite attractive. Anytime you can get a 10.5% dividend yield on an investment, you have to feel good about it from a cash flow perspective. Moreover, compared to some of the other big names in the industry, this yield is highly compelling. ARCC, for example, offers just a 9.5% dividend yield, Blue Owl Capital Corporation (OBDC) offers just a 9.8% dividend yield, MAIN offers just a 6.3% dividend yield, and Hercules Capital (HTGC) offers just an 8.9% dividend yield. Among the top seven BDCs by market cap, only FSK has a higher dividend yield than BXSL.
#2. BXSL Stock’s Dividend Is One Of The Strongest Growers
On top of its very attractive current dividend yield, BXSL’s dividend is one of the very best dividend growers among the leading BDCs. The analyst consensus currently forecasts the following dividend changes in 2024 relative to 2023 (note that this includes special dividends):
| BDC | 2023 Dividend | 2024 Dividend | Change |
| ARCC | $1.92 | $1.93 | +0.7% |
| OBDC | $1.59 | $1.65 | +3.8% |
| BXSL | $2.92 | $3.11 | +6.3% |
| FSK | $3.19 | $2.90 | -9.1% |
| MAIN | $3.70 | $3.11 | -15.9% |
| HTGC | $1.90 | $1.65 | -13.2% |
| Golub Capital BDC (GBDC) | $1.51 | $1.69 | +11.9% |
Moreover, since the start of 2021 (when BXSL went public), BXSL has the most impressive dividend growth track record:
| BDC | 2021 Dividend | 2024 Dividend | Change |
| ARCC | $1.62 | $1.93 | +19.1% |
| OBDC | $1.24 | $1.65 | +33.1% |
| BXSL | $2.03 | $3.11 | +53.2% |
| FSK | $2.47 | $2.90 | +17.4% |
| MAIN | $2.48 | $3.11 | +25.4% |
| HTGC | $1.31 | $1.65 | +30.0% |
| GBDC | $1.17 | $1.69 | +44.4% |
Finally, BXSL currently trades at an 11.22% premium to NAV, enabling the company to issue shares accretively if it so chooses, which should help to fuel further dividend growth.
When combining its impressive dividend yield with its impressive dividend growth, it is hard to beat BXSL in the BDC space.
#3. BXSL Stock’s Dividend Is One Of The Safest In The Sector
Last, but not least, BXSL’s dividend is also one of the safest in the sector. First of all, it has by far the most exposure to first-lien loans among any of the top seven BDCs by market cap and the greatest first-lien exposure of any BDC that pays a dividend, with 98.5% of its portfolio invested in these loans. This conservative approach to its portfolio has led to the lowest non-accrual rate in the sector with less than 0.1% of its debt investments currently on non-accrual.
Moreover, it has an investment-grade balance sheet, a conservative 1.0x leverage ratio, $1.8 billion in liquidity, a well-laddered debt maturity profile, and is managed by the world’s largest alternative asset manager (Blackstone (BX)), which happens to have an incredible track record in its own right:
As well as in running BXSL for shareholders, nearly doubling the performance of the broader sector since taking BXSL public:
Put simply, these guys know how to allocate capital.
Finally, its dividend in Q4 was covered 1.25x by net investment income, giving it one of the more conservative payout ratios in the BDC sector. As a result, it appears very well-positioned to sustain and even continue to grow its hefty dividend moving forward.
Investor Takeaway
Between its attractive double-digit current dividend yield, impressive dividend growth track record and outlook, strong balance sheet, conservative underwriting, skilled management team, and significant net investment income coverage of its dividend, BXSL appears to have the best all-around dividend in the BDC sector for investors who are focused solely on income and not worried about maximizing total returns.
That being said, BXSL is definitely not cheap right now as it is trading at a hefty valuation premium even as the outlook for the BDC sector is growing increasingly murky due to counterparties facing tighter and tighter interest coverage ratios due to being squeezed by higher-for-longer interest rates and persistently sticky inflation.
As a result, I rate it a Hold right now and – as an investor who is focused on generating significant market outperformance over time – do not plan on buying it until it dips into discount territory again.
