2 BDC Stocks to Buy and Hold That Earn More Than Their Regular Dividends

Main Street Capital's (NYSE: MAIN) regular dividend is $0.795 per share per quarter, and it generated distributable income of $1.04 per share in the second quarter of 2026. That equates to roughly 130% coverage. Hercules Capital's (NYSE: HTGC) regular dividend is $0.40 per share per quarter, and it generated net investment income of $0.50 per share in the second quarter. That's 125% coverage.

However, both of these business development companies (BDCs) pay supplemental dividends, which complicates the dividend story in a very important way. Here's what you need to know before buying either of these ultra-high-yield BDCs.

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BDCs: High yield, high risk

The big draw with BDCs in general is their high yields. Hercules Capital's yield is 11.6%, while Main Street's yield is 8.2%. But those numbers aren't exactly the right way to look at the dividends, because Hercules' yield is based on a regular dividend of $0.40 per share per quarter and a supplemental dividend of $0.07 per share per quarter. Main Street's regular dividend is $0.265 per share per month, with a quarterly supplemental dividend of $0.30 per share.

The reason for supplemental dividends is that the investment income business development companies generate can be volatile. In short, BDCs make high-interest loans to smaller companies that don't have easy access to other forms of capital. During economic downturns, smaller companies can sometimes struggle to cover their interest expenses. Moreover, the debt BDCs provide often carries floating rates, so higher interest rates can increase the interest burden on the companies they finance.

Yes, higher rates can increase the interest income a BDC generates. But if a portfolio company can't afford to pay more interest, then the real outcome is still bad for the BDC. Simply put, BDCs are fairly complicated investments with material inherent risks that you shouldn't ignore.

Main Street and Hercules Capital have breathing room

This is why it is so important to separate the regular dividend from the supplemental dividends paid by Main Street and Hercules Capital. The supplemental dividends are meant to be extra, rewarding investors when these two BDCs do well. The regular dividend is the one you should focus on when considering the ongoing income these investments will generate.

On that score, Main Street's regular dividend yields roughly 5.9%. Hercules Capital's regular dividend yields 9.9%. Both are still very attractive, noting that the S&P 500 index (SNPINDEX: ^GSPC) yields a paltry 1% or so. The big story, however, is that Main Street's distributable income covers its regular dividend by 130%, while Hercules Capital covers its regular dividend by 125%.

That leaves material room for adversity before the regular dividend would be at risk of a cut. And a reduction in the regular distribution likely wouldn't occur until after the supplemental dividends were halted. So there's even more protection than there seems, when you consider the nature of the supplemental dividends.

Safety first with BDCs

The real risk with BDCs is that investors stretch for yield and end up buying a stock that can't cover its dividend if it faces adversity. Main Street and Hercules Capital appear well positioned to do just that, if you understand the dividends they pay. Because both of these ultra-high-yield stocks handily cover their regular dividends, they have ample room to deal with the completely normal economic swings that happen through a full business cycle.

However, you need to remember that the supplemental dividends aren't meant to be a permanent income stream. In a recession, which will eventually happen and is a totally normal event, the supplemental dividends will likely be cut or eliminated. Still, with Main Street's 130% coverage of its regular dividend and Hercules' 125% coverage, the regular dividends are well positioned to handle such adversity, making both of these BDCs relatively attractive as potential long-term holds.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.