Are You Falling For These 3 BDC Dividend Myths?

Summary

• BDCs have two issues: 1) almost no margin of safety for dividend coverage, and 2) depressed earnings outlook.
• For many players it is just a matter of several quarters before they become forced to cut dividends.
• Yet, there are many arguments, which negate such a view. Unfortunately, many of them ar myths.
• In this article, I provide important details, which, in my view, clearly debunk these myths.

It is not a secret that the situation for BDCs does not look great. The odds for experiencing system-wide dividend cuts are very high. As the primary return source of BDCs is the yield (current income), then it is only logical that we have become more focused on the BDC dividend sustainability aspect than, say, some price appreciation and/or depreciation movements.

For example, in my case I have invested a notable chunk of my capital into BDCs for accelerated recurrent income compounding by locking in 9% to 13% yields.

Now, speaking of the overall set-up for BDC dividends, then the combination of these five broad/structural items captures the story nicely:

1. The sector average base dividend coverage is 102%.
2. Most BDC earnings have been on a decline for several quarters in a row driven by spread compression and consequences from decreased interest rates in late 2024.
3. The interest rates are clearly heading lower from here, suggesting further pressures on the earnings.
4. The sector average debt to equity is 1.19x, which means that the debt capacity to offset price pressures through expanded portfolios is limited.
5. The sector average P/NAV is 0.96x, which is a very minor discount. 

In a nutshell, the margin of safety in the system is almost non-existent, which does not look good in the context of (very likely) declining earnings and price-to-NAV aligned valuations.

My expectations is that we will see many BDCs revisiting their dividends to the downside (and soon). So far I have already circulated relevant articles on this topic, elaborating on specific BDCs, which are likely to register dividend cuts.

For example:

2 BDCs To Dump Before The Fed Cuts – click here.

It’s All Downhill For Most BDCs, Here Is My Approach – click here.

There are obviously people, who disagree with this, which is fine (i.e., their assumption is that BDCs will actually benefit from lower interest rates as they would lead to increased loan investment activity). But what I have observed is that there are some common denominators in their arguments, which are simply myths.

Let me highlight the three most popular ones.

Myth #1: Spillover income will come to rescue

BDCs are required per regulation to pay out majority of their earnings, which is a big reason why they are so compelling yield instruments.

However, periodically, BDCs recognize significant gains from either attractive equity sales or valuation adjustments, which do not feed into the net investment income figure, but contribute to the overall earnings figure. Many BDCs want to avoid volatile dividends, so part of these kinds of income streams get retained at the BDC level (on top of ~10% that is set as maximum NII share that can be retained). The result of it translates into undistributed spillover income.

And it is exactly this undistributed spillover income, which is commonly used by folks, who want to make a case for certain BDCs keeping their dividends intact despite unsustainable coverage levels (i.e., a situation when NII per share is lower than base dividend per share). The idea would be that BDCs could tap into the accumulated spillover to cover the shortfall.

Let me give you two arguments, why the undistributed spillover income is largely irrelevant in the context of dividend sustainability assessments.

First, most BDCs that have cut their dividends have had unexhausted undistributed spillover income. For example, in early 2025, Goldman Sachs BDC (NYSE:GSBD reduced its base dividend from $0.45 per share to $0.32 per share. At the time or dividend reduction, the spillover income was about ~$1.40 per share. Here it is important to note that after the dividend cut, GSBD has continued to distribute special dividends by utilizing portion of the accumulated spillover income. The total dividend per share translates to $0.48, which has been way above what GSBD earns in adjusted NII per share (hence, we see smaller portfolio base, which in the medium to long-term will generate less and less income).

Similarly, TriplePoint Venture Growth BDC Corp. (NYSE:TPVG cut its dividend in mid-2024, even though it had a notable amount of spillover (e.g., in Q1, 2025, the estimated spillover income was $1.06). In fact, I have not identified a BDC, which has trimmed its dividend, while having absolutely nothing in the spillover income.

Second, the logic behind why undistributed spillover is a largely irrelevant figure lies in the fact that it is simply an accounting item. It is not that BDCs have a separate category in their balance sheets under assets, where spillover is recognized and backed by cash. If there is a NII shortfall in funding base dividends, then BDCs have to somewhere access cash to cover the payments. Usually, this happens through additional leverage or redirection of received loan principal amount repayments, which do not feed into the NII per share figure. Both of these sources are obviously unsustainable in the long-run (and for some already in the short-run if capital structured are overloaded with debt).

Myth #2: High-quality should save the day

Another myth in relation to BDC dividend sustainability factors is the notion of high-quality acting as a shield to the aforementioned (in the intro section) headwinds. 

High-quality, usually, means the following:

• Focus on senior secured first-lien loans.
• Structurally low non-accruals.
• High portfolio company interest coverage ratios.
• No meaningful PIK streams.
• Leverage below 1.20x.

Morgan Stanley Direct Lending Fund (MSDL and Blackstone Secured Lending Fund (NYSE:BXSL are great examples of how high-quality BDCs look.

Yet, the problem here is that strong quality does not automatically translate to strong and sustainable dividend coverage. BXSL and MSDL have base dividend coverage levels of 100% and 102%, respectively. In the meantime, their NII per share figures have been declining for several months in a row. Since they invest in upper middle market space and do so through first-lien floating loans, they are directly exposed to the spread compression and falling base rate risks. They do not have the luxury of small-cap focused BDCs – Fidus Investment (NASDAQ:FDUS , which can largely avoid the negatives from mushrooming demand in the middle market or equity-focused BDCs – Main Street Capital (NYSE:MAIN , which can potentially monetize their equity stakes to close dividend coverage gaps.

While high-quality is certainly important, it will not automatically solve the issue.

Myth #3: 2020 – 2022 proves that lower base rates are not that harmful

The third myth is that lower base rates will not trigger dividend cuts because when the interest rates were ultra-accommodative in 2020 – 2022 period, BDCs were producing rather stable current income streams.

Optically, this is a valid and correct argument.

However, let me quickly prove why this time things are different.

First, over the past couple of years, many BDCs have hiked their base dividends because of much richer all-in yields (SOFR-driven). For example, PennantPark Investment (NYSE:PNNT , BXSL and Golub Capital BDC (NASDAQ:GBDC have their 3-year dividend CAGR metrics at 13.1%, 24.6%, and 9.7%, respectively.

This has established a more aggressive baseline amount that has to be funded each quarter or month (depending on BDC). While the portfolios have also grown, the rate of change has not been so notable as for the dividends. Remember, BDCs are forced to pay out majority of their earnings, hence the internal compounding process is quite slow.

Second, we can take almost any BDC as an example here to see how negative the effects have been by the Fed’s decision to lower base rates in late 2024. As a result of the previous cuts, the lion’s share of BDCs is having now significantly lower NII per share results compared to the same period last year (I am talking about Q1 and Q2, 2025 comps). Let me give you here also some interesting examples, comparing Q2, 2024 (before recent Fed cut earnings) to Q2, 2025:

• MSDL – NII per share of $0.63 in Q2, 2024 vs. $0.50 in Q2, 2025. 
• BXSL – NII per share of $0.89 in Q2, 2024 vs. $0.77 in Q2, 2025. 
• Nuveen Churchill Direct Lending Corp (NYSE:NCDL – NII per share of $0.57 in Q2, 2024 vs. $0.46 in Q2, 2025. 

Over this time period, these 3 BDCs have not had any meaningful non-accruals or other shock-events, which could theoretically explain so notable drops in the NII per share generation. Instead, the key driver has been simply the lowering of base rates.

Third, back in 2020, 2021 and 2022, the spreads were much higher than now. For instance, in 2021 when the Fed Funds rate was 0%, Ares Capital (NASDAQ:ARCC carried weighted average yields of almost 9%, which is just by ~100 basis points below what it has reported for Q2, 2025. Yet, the difference between SOFR in 2021 and SOFR now is about 4.4% (or 440 basis points). If we look at the overall junk bond spreads, we will notice the same thing – i.e., spreads at 10-year lows.

In a nutshell, things are very different from 2020 – 2022 period, and this time, lower base rates will likely catch many BDC dividend investors off-guard.

The bottom line

The risk of system-wide BDC dividend cuts is high. For many BDCs it is only a matter of one, two or three quarters before they revisit their distribution profiles to the downside.

In the article I have also elaborated on three key myths that are typically used by ‘BDC dividend sustainability bulls’. As described above, undistributed spillover, high-quality and/or reference to 2020-2023 period, when rates were 0% are unlikely to help.

Photo by Jocke Wulcan on Unsplash