It is tough to find Business Development Companies (BDCs) that meet my criteria for the safety of dividend payments and growth prospects; however, in recent months, I have shifted more focus to Hercules Capital Inc. (HTGC), notes Tim Plaehn, income specialist and editor of The Dividend Hunter.

Hercules Capital is one of the oldest BDCs, founded in 2003 and available to investors through a 2005 IPO. The company is internally managed, with a $2 billion market cap and a $3.2 billion enterprise value (market cap plus debt), making Hercules Capital is one of the larger companies in this sector.

What sets Hercules apart from its peers is its client focus. Hercules works with venture capital and private equity firms to provide funding for pre-IPO companies or being groomed for mergers or acquisitions. The BDC lives up to its name, providing financing primarily to various types of technology-related companies.

To assist its client companies and their venture capital backers, Hercules makes only senior debt loans with maturities of 3 to 3 1/2 years. About 90% of its assets are loans, with 10% as equity positions that can pay off very well when a client goes public or is acquired.

The loans made by HTGC carry an effective yield of 12.7%. The typical loan has a 9% to 10% coupon rate, and the effective yield gets boosted by commitment and origination fees. Equity profits and early termination fees have increased Hercules's average returns to above 15%.

The company's relationships with over 500 venture capital-type firms have allowed HTGC to grow its book of business steadily and step-by-step increase its annual dividend. Since 2010, the annual dividend has increased from $0.80 per share to, to the current level at $1.32. The regular quarterly rate increased by a penny in October 2021.

For the final quarter of 2018, Hercules started to pay small supplemental dividends on top of its regular quarterly rate. Over the last three years, the additional dividends have grown from $0.01–$0.02 to the current $0.05–$0.07 each quarter.

Hercules’ regular dividend gives a current 7.4% yield — an excellent return from one of the very best BDCs. The company’s supplemental dividends should add another $0.25 to $0.30 in income per year. This BDC has been very steady while flying under the investing public's radar.

Finally, all HTGC customer loans carry floating interest rates. As rates rise, so will the net investment income earned. In a recent presentation, Hercules noted that the annual net investment income will grow by $0.14 per share for each one percent increase in interest rates. (Disclosure: Tim Plahen has a personal position in HTGC.)

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