Wells Fargo Highlights Two Top Dividend-Paying BDCs with High Yields for 2025

As 2025 approaches, investors are preparing for potential shifts in economic policy that may include pro-business and deregulatory measures. The expectation of lower inflation and interest rates could relieve debt pressures, presenting positive conditions for lenders and financial services firms. In this environment, business development companies (BDCs) are gaining attention due to their role in providing capital to small- and mid-sized businesses—a sector that is central to the U.S. economy.

Ad

BDCs, which operate outside the traditional banking system, are attractive investment options for those seeking solid dividend yields. They are required to return a significant portion of their income to investors, making dividends an appealing feature for shareholders. Wells Fargo analyst Finian O’Shea has identified two standout BDCs that show promise as potential high-yield investments.

Runway Growth Finance Corporation (RWAY)

Runway Growth Finance Corporation specializes in venture debt, supporting startup companies in sectors like technology, healthcare, and consumer goods. By focusing on non-dilutive financing, Runway enables its client companies to maintain ownership stakes, which is particularly valuable for founders and early investors in startups.

Advertisement

Since its inception in 2015, Runway has backed over 60 companies and executed 91 deals amounting to nearly $3 billion in loan commitments. Most of the firms it supports have annual revenues between $10 million and $20 million and are seeking loans between $10 million and $75 million. The company's goal is to empower innovative entrepreneurs and help them scale their businesses.

In its most recent financial report for the third quarter of 2024, Runway reported $36.7 million in investment income, although this fell short of estimates by $1.32 million. However, net investment income came to $15.9 million, or 41 cents per share, covering the regular dividend payment. On November 5, Runway announced a dividend of 40 cents per common share, paid on December 2. This brings its annualized dividend rate to $1.60 per share, equating to an impressive yield of over 15.3%.

Wells Fargo’s O’Shea noted that Runway's shares have underperformed the industry by about 18% year-to-date, currently trading at 0.78 times book value. He suggests that the stock may be poised for recovery, given current market conditions. O’Shea upgraded Runway's rating to "Overweight" and set a price target of $11, predicting a potential 5% increase over the coming months. With its high dividend yield factored in, investors could see a total return of over 20% in a year.

Ares Capital Corporation (ARCC)

Ares Capital Corporation, a major player in the U.S. small business finance sector, has been a reliable source of credit for nearly two decades. It maintains a diverse portfolio valued at approximately $25.9 billion, comprising 535 companies backed by 240 private equity sponsors. Its investment mix is weighted heavily toward first-lien senior secured loans, which make up about 53% of the portfolio, with additional stakes in second-lien loans and preferred equity.

The company’s income has shown strong growth, with third-quarter 2024 total investment income reaching $775 million—up more than 18% year-over-year and surpassing estimates by $1.7 million. Ares Capital’s non-GAAP earnings per share (EPS) for the quarter were 59 cents, falling slightly short of forecasts but still robust enough to support its dividend. On October 30, Ares declared a 48-cent common share dividend, payable on December 30, yielding an annual rate of $1.92 per share and an attractive forward yield of around 8.7%.

O’Shea highlighted Ares Capital’s top-tier credit performance, noting that it has outshined many peers amid the current high-interest rate environment. The analyst believes that the company’s solid record in structured and junior credit will benefit from a potentially lower base rate environment, which could expand its investment opportunities. With this in mind, O’Shea upgraded Ares Capital’s rating to "Overweight" and set a $23 price target, implying a 4% potential increase in the next year. Adding in the dividend yield, total returns could approach 13%.

Overall, Ares Capital is highly regarded by analysts, earning a "Strong Buy" consensus with 8 Buy ratings and 2 Holds. Trading at $22.10, the stock has an average price target of $22.40, suggesting a stable outlook in the near term.

Why Consider These BDCs?

Both Runway Growth Finance Corporation and Ares Capital Corporation offer investors attractive dividend yields and potential for growth as we move into 2025. Their roles in supporting small businesses and strong financial records make them solid choices for income-focused portfolios.

Also Read: Wall Street Predicts Strong US Economic Growth and Market Gains in 2025