We recently published an article on 10 Best BDC Stocks To Invest In. In this article we will look at where Oaktree Specialty Lending Corporation (NASDAQ:OCSL) ranks among the 10 best BDC stocks.
Business Development Companies (BDCs) represent a compelling investment option for those looking to support smaller enterprises while earning a steady income through high dividend yields. BDCs operate as closed-end investment firms, specializing in providing much-needed capital to small and mid-size businesses that often face challenges accessing traditional sources of funding, such as bank loans or public equity markets. This unique business model allows BDCs to fill an essential gap in the financial ecosystem, supporting companies in various stages of development, including those undergoing turnarounds, experiencing financial distress, or poised for growth.
Established under the Investment Company Act of 1940, BDCs are required to meet specific regulatory standards, including maintaining registration with the Securities and Exchange Commission (SEC). What sets BDCs apart from private equity or venture capital firms is that they are publicly traded, giving regular investors access to an asset class that was once reserved for accredited or institutional investors. To qualify as a BDC, a company must allocate at least 70% of its assets to investments in privately-held or publicly-traded firms with market capitalizations below $250 million. This structure positions BDCs to invest in businesses that can benefit from their expertise and financial resources, generating returns for both the BDC and its investors.
One of the most attractive features of BDCs is their potential for generating income. Many BDCs offer dividend yields above 5%, with some even exceeding 10%. These high yields make them particularly appealing to income-focused investors. However, it’s important to approach BDC investments with careful due diligence, as high dividend yields can sometimes mask underlying financial issues. Investors need to ensure that a BDC’s portfolio and business fundamentals are strong enough to support consistent dividend payments without risking cuts in the future.
BDCs often rely on debt to finance their investments, which introduces leverage into their business models. This leverage can amplify returns during favorable economic conditions, allowing BDCs to maximize the value of their investments. However, leverage can also work against them during economic downturns, magnifying losses and putting pressure on their balance sheets. As a result, BDCs can be more volatile compared to other income-generating investments, particularly during periods of market turbulence.
Interest rates also play a significant role in the performance of BDCs. Since many BDCs borrow funds to invest, rising interest rates can increase their borrowing costs, potentially cutting into profits and reducing the overall returns to investors. Credit risk is another important factor to consider, as BDCs typically invest in smaller businesses that may be more vulnerable to financial instability or default. Analyzing the quality of a BDC’s portfolio and its risk management practices is crucial for investors looking to avoid excessive losses.
Tax considerations are another factor that makes BDCs unique. BDCs are required by law to distribute at least 90% of their taxable income to shareholders, which is why they often offer such high dividend yields. However, BDC dividends are not typically classified as “qualified dividends,” meaning they are taxed at ordinary income rates rather than the lower rates applicable to qualified dividends. For this reason, BDC investments may be better suited to tax-advantaged retirement accounts like IRAs or 401(k)s, where the tax impact can be minimized.
Despite these complexities, BDCs remain an attractive option for many investors, particularly those seeking high yields and exposure to a diverse range of smaller companies. For those willing to carefully evaluate the risks, BDCs offer the potential for both income and capital appreciation. In the following sections, we will highlight ten of the best BDC stocks to consider for your portfolio, analyzing their dividend yields, financial health, and overall investment potential. Whether you’re a seasoned income investor or new to BDCs, these stocks could provide valuable opportunities for steady returns in today’s market.
Our Methodology
We sifted through online rankings and ETFs to come up with a preliminary list of 15 BDC stocks. We then examined Insider Monkey’s data on over 900 hedge funds, as of Q2 2024, and picked the 10 that were the most popular among elite hedge funds. The stocks are sorted in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Oaktree Specialty Lending Corporation (NASDAQ:OCSL)
Number of Hedge Fund Holders: 9
Oaktree Specialty Lending Corporation (NASDAQ:OCSL) stands out as a solid business development company (BDC) stock, making it a key candidate for inclusion in the article 10 Best BDC Stocks To Invest In. The company specializes in providing capital to small and mid-sized businesses across a variety of industries, making it a valuable player in the middle market lending space. Oaktree Specialty Lending Corporation (NASDAQ:OCSL) investment approach focuses on first and second lien debt, mezzanine loans, and equity investments, providing a diversified portfolio that balances risk and reward. Its exposure to industries like healthcare, technology, and consumer services strengthens its potential for stable returns, especially in an uncertain economic environment.
Despite missing earnings expectations in Q3 2024, with a reported EPS of $0.55 compared to the expected $0.57, Oaktree Specialty Lending Corporation (NASDAQ:OCSL) remains fundamentally strong. The company’s net asset value (NAV) per share fell slightly to $18.19, down from $18.72 in the previous quarter, primarily due to markdowns in non-accrual investments. However, OCSL continues to perform well, with its portfolio showing a significant focus on first lien debt investments, now accounting for 82% of the portfolio. This strategic shift towards senior secured debt is aimed at reducing risk while maintaining solid returns.
Oaktree Specialty Lending Corporation (NASDAQ:OCSL) offers a robust dividend yield, a key metric for income-focused investors. The company declared a quarterly dividend of $0.55 per share, which remains consistent with the previous quarter. This dividend, coupled with the company’s management fee reductions, reflects OCSL’s commitment to delivering value to shareholders. The fee reduction is expected to increase annual adjusted net investment income by approximately $12 million or $0.15 per share, further enhancing Oaktree Specialty Lending Corporation (NASDAQ:OCSL) attractiveness as a BDC stock.
Additionally, Oaktree Specialty Lending Corporation (NASDAQ:OCSL) maintains a healthy liquidity position, with $828 million available on credit facilities and $96 million in cash at the end of Q3. With a solid leverage ratio of 1.1 times and continuous strong origination activity, OCSL remains well-positioned to navigate market volatility and capitalize on new investment opportunities.
Alphyn Capital Management stated the following regarding Oaktree Specialty Lending Corporation (NASDAQ:OCSL) in its first quarter 2024 investor letter:
“Oaktree Specialty Lending Corporation (NASDAQ:OCSL): We previously owned the company but exited after Brookfield acquired its parent, Oaktree, and redeployed the capital at the top of the ownership stack in Brookfield. I reinvested in the fourth quarter of last year, given the attractive yield of 11% in the current high interest rate environment, approximately double that of treasuries, but not double the risk in my view.
OCSL’s $3 billion portfolio consists primarily of fixed income investments across 146 companies, with a strong focus on senior debt (78% first lien, up from 54% when Oaktree first took over management of the portfolio) and a flexible mandate that allows them to invest in liquid credit markets and secondaries, enabling them to capitalize on market dislocations. As part of the Oaktree group, it benefits from access to the parent’s extensive syndication platform, credit expertise, and resources to manage and work out the occasional loan delinquency.”
Overall, OCSL ranks 6th on our list of the best BDC stocks to buy. While we acknowledge the potential of OCSL as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than OCSL but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This post was originally published on Insider Monkey.