It is not hard to see why Business Development Companies—or BDCs—are popular investments among income investors.

Consider that the S&P 500 Index currently has an average dividend yield of just 2%. With the 10-year U.S. Treasury Bond yielding 2.2%, bonds aren’t much better right now.

This underscores the challenge for income investors. In a climate of low interest rates, yields are very low.

Meanwhile, BDCs typically offer very high dividend yields. For example, Gladstone Investment Corporation (GAIN) is a BDC with a current dividend yield of 8.4%.

It is one of 416 stocks with a 5%+ dividend yield.

And, it is one of a select few stocks that pays its dividend each month.

GAIN is one of just 29 stocks that pay monthly dividends.

This article will discuss GAIN’s business model, and whether the sky-high dividend yield is too good to be true.

Business Overview

GAIN is a Business Development Company that places debt and equity investments in privately-held companies, which are at an early stage of development.

A collection of GAIN’s portfolio investments is as follows:

Source: March Quarterly Review Presentation, page 13

Its debt investments primarily consist of senior term loans, senior subordinated loans, and junior subordinated loans.

On the equity side, investments primarily consist of preferred or common stock, or options as a means of acquiring stock. Equity investments are usually made in anticipation of a buyout or some form of recapitalization.

Investments are made in the lower-middle market segment, meaning companies that are medium-sized. GAIN intends its portfolio to have a 75%-25% split between debt and equity investments.

Source: March Quarterly Review Presentation, page 7

GAIN makes money in two ways. First, when its investments are successful, it will realize capital gains. In addition, it receives interest and dividend income from securities held.