Dividend Dynamo: BDCs, Coverage, and Catching the RSI Wave

I’ve said it before, and I’ll say it again: Business Development Companies (BDCs) have a special place in my portfolio. The reason is simple — they usually make sure their dividends are well-covered by the income they generate. That coverage acts as a cushion, and it’s exactly why I focus so heavily on it. The market has little patience for BDCs with weak coverage, and prices tend to tumble when investors lose faith in a dividend.

Of course, the backdrop is shifting. With the Fed beginning to cut rates (see CNBC or Reuters), the sector is expected to face downward pressure. BDCs have benefitted enormously from higher floating rates on loans over the past few years, but lower rates will slowly chip away at that tailwind.

So why do I still like them here? Because BDCs are often range-bound. They don’t endlessly run higher like a tech stock on hype, nor do they collapse into oblivion. Instead, they oscillate within fairly predictable bands. That’s where the Relative Strength Index (RSI) comes into play. For assets with this kind of trading pattern, RSI is useful. When RSI drifts down toward 30, it flags oversold conditions … and historically, that’s been a good time to start building or adding positions.

Take a look at the chart. These are some of my favorite BDCs; I’ve been adding to FDUS, ARCC, and BXSL recently, while MSDL and OBDC are already solid holdings in my portfolio. Over the past month, they’ve all given back some ground (top part of the chart). But here’s the interesting bit: every one of them is now sliding into the RSI “buy zone” (bottom of the chart). BXSL has been camped down there for a while, and the setup is starting to look attractive across the board — not just for these names, but for plenty of other BDCs too.

In fact, one of the sector’s most reliable commentators recently pointed out that the average RSI for BDCs is already down around those oversold levels. The takeaway? This current pullback could be creating exactly the sort of entry points that patient investors wait for. Paying attention to ex-dividend dates, relative valuations versus historical lows, and, above all, dividend coverage and credit quality, can help separate the gems from the traps.

Personally, I’m not rushing in big-time. I already have a large BDC portfolio that I’ve been building for years, and my playbook is clear: I like to add lots during extreme opportunities. But when the setup is right (strong coverage, solid portfolio quality, and RSI in bargain territory), then it’s worth sharpening the pencil.

So here’s the formula for this environment:

1. Stick with BDCs that cover their dividends.

2. Accept that rate cuts may pull prices down … and treat that as an opportunity, not panic.

3. Use the RSI as a compass to buy the dips in this range-bound sector.

That’s how I approach it: steady, systematic, and focused on coverage first.

So … what do I think is in great shape right now? Check out FDUS - Fidus. This is a nice BDC, one of my favourites, though it isn’t well known. And, best of all, it has good dividend coverage and should be fine even if rates decrease!

What do you think? Are you adding to your BDC investments?

Hit reply and let me know!